Where next for the National Minimum Wage?

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We recently submitted our response to the Low Pay Commission ahead it's 2014 report. Here's an overview of our response:

Outlook for the UK Economy – October 2014-2015

  • Recent data suggest that unemployment has now fallen below 2.5m and our forecasts suggest the ILO rate of unemployment should start to fall slowly from the beginning of 2014.
  • Manufacturing sector employment bucked its long-term trend in 2012, with the number of jobs in the sector increasing by 2.8%, and while we do expect employment in the sector to fall in 2013, this is likely to be at a much smaller rate than we have seen historically.
  • However, these forecasts are contingent on limited wage inflation. In the past two years EEF's Pay Settlement surveys have shown that annual pay increases have remained at fairly modest level between 2.1% and 2.5%

The impact of the NMW

  • The NMW has limited direct impact on manufacturers, with employees earning above NMW, as highlighted in EEF's Pay Benchmark surveys.
  • However it does indirectly impact companies that use outsourced services. These are often labour-intensive, supplied by organisations where increases to NMW are then passed onto customers. This indirect impact can then make companies less competitive, at a time where manufacturers are competing both on quality and cost.
  • Companies would benefit from greater certainty about the impact of potential future costs increases.

Conclusion: The NMW rate must be set by a formula that looks retrospectively at the movement of basic rates of pay. We consider the average level of basic pay settlements that has been reached across the economy over the previous 12 months to be a real approximation for this measure.

Young people

  • Youth unemployment remaining high at a time where four in five manufacturers are experiencing recruitment problems reflects a real mismatch of skills.
  • A notable increase to the Youth Development Rate (YDR) will not alleviate this problem, but risks exacerbating further if it deters employers from recruiting young people with low skills.
  • The focus for young people should be on giving them the skills, experiences and qualifications required by employers.

Conclusion: Government must strike a balance between increasing the YDR and ensuring employers are incentivised to recruit young people.

NMW Rate for Apprentices

  • The Apprentice Rate of the NMW has had very limited on manufacturers.
  • EEF's Skills Survey showed that only 1% of companies considered the NMW for Apprentices as a barrier to taking on more apprentices.
  • Since its introduction the numbers of apprenticeship starts have increased (457,000 starts in 2010/11 to 520,600 in 2011/12.)
  • Whilst EEF's Pay Benchmark reveals manufacturers pay Craft and Technician Apprentices far beyond the NMW – looking across the economy such pay is not consistent across all apprenticeship frameworks.

Conclusion: The introduction of the NMW rate and the rate to which it has increased since 2010 has not affected supply of or demand for apprenticeships; therefore it should continue to increase in line with the adult NMW.

Economic conditions for increasing the NMW rate above basic pay

  • The NMW should reflect economic conditions to ensure it does not have a disproportionate effect on employment and firms' ability to take on new employees. Since its inception the NMW has risen more strongly than either basic pay or inflation

  • The NMW should increase in line with basic pay, but should not be increased at a faster rate as economic conditions remain challenging.
  • Any accelerated increases to NMW must only occur when economic conditions are strong enough to make such a rise sustainable.
  • Sustainable pay rises are those based upon productivity improvements in their workforce. Rising productivity across the economy is likely to be association with an increased ability to pay higher basic wages.
  • Employment must be growing too, and this must be linked to productivity growth. Employment trends since the 2008 recession show employers held onto employees, and may have taken on new employees as an alternative to investment in capital.
  • This has led to falling productivity in an number of sectors. This is not an increase in employment that is consistent with employers bring able to afford large pay rises.

Conclusion: Only when we see a combination of broad-based sustainable growth in both employment and productivity would businesses be better able to afford a stronger increase in the NMW based on basic pay growth.

Read our full response here.

Author

Head of Education & Skills Policy

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