4 Since the introduction of the National Minimum Wage, we have carefully monitored its impact on the economy in general and the labour market in particular. We have continued this work for the 2009 Report. In our 2008 Report, we recommended that the adult rate increase by 3.8 per cent in October 2008, expecting this rise to be just under average earnings growth but far greater than price increases. As it turned out, the minimum wage increased faster than average earnings growth but looks likely to be higher than price inflation averaged over the year. This would imply that the value of the minimum wage would increase in real terms, relative to prices, and that its bite, in relation to earnings, would also increase. Our latest estimates of coverage suggest that around 0.9–1.0 million workers would have been covered by the 2008 minimum wage upratings, similar to the coverage of the slightly lower 2007 upratings but fewer than the 1.1 million covered by the higher 2006 upratings (5.9 per cent).

5 The data available to date prevents us from assessing fully the impact of the October 2008 upratings and, although we have noted any effects that have already become evident, our focus has been on the impact of the October 2007 upratings and previous increases in the minimum wage.

6 As expected, we found that the bite of the minimum wage relative to average and median earnings following the 3.2 per cent increase in the 2007 upratings, was lower than the bite after the larger 5.9 per cent minimum wage increase in October 2006. But the bite relative to the lowest earnings decile increased.

7 We have again found that minimum wage jobs are more likely to be held by women, young workers, those of retirement age, ethnic minorities, those with a disability, and those with no qualifications. They are also more likely than better-paid jobs to be part-time and temporary. Higher incidences of minimum wage jobs are found in small firms, in the private sector, in particular areas of the UK, and in certain industries and occupations.

8 Prior to this report, much of the research that we had commissioned or that had been conducted externally had concentrated on the impact of the introduction of the minimum wage and its initial upratings. This time we commissioned a comprehensive research programme that focused on the impact of the large upratings in the minimum wage that were implemented between October 2003 and October 2006. Firms appear to have adapted to these increases in wage costs by changing pay structures, removing wage premia, and reducing non-wage costs. The research found little evidence to suggest that the increases in the minimum wage had led to reductions in employment or hours worked. There was also no evidence that the minimum wage had led to changes in productivity, but some evidence suggests that profits had been squeezed. In all, we conclude that the minimum wage continues to exert a benign influence on the economy.

9 Since that research was commissioned and much of our analysis was conducted, though, the economic climate has changed dramatically. The downturn in the labour market only starts to become apparent in the data from the spring of 2008. From this point, employment growth slowed, vacancies fell and redundancies rose steeply, leading to sharp rises in unemployment and, by the autumn, employment and the number of employee jobs had fallen. It is the first time that year-on-year aggregate employment has fallen since the introduction of the minimum wage. These adverse outcomes are observed across the whole economy, with nearly every sector and most groups of workers affected.

Chapter 3: Low-paying Sectors and Small Firms

10 In previous years, the minimum wage has had the greatest impact on small firms and those sectors with either a large number or high proportion of jobs paying at or around the National Minimum Wage. We have again assessed the impact the minimum wage has had on these sectors by drawing on a variety of material, including multiple data sources, our commissioned research, other independent research, surveys of the market and employers, and our consultation.

11 The ten low-paying industries we have identified accounted for over 8.4 million jobs in December 2008, almost a third of all jobs in the UK. We have reviewed the number of jobs at and below the minimum wage, employment trends and other measures that might indicate any impact from the minimum wage. We found that overall the proportion of jobs paid at the minimum wage in April 2008 remained at the same level as in April 2007. Some low-paying sectors, however, experienced a rise in the proportion of jobs at the minimum wage (e.g. cleaning, social care) and others a fall (e.g. retail, leisure).

12 The low-paying industries have experienced a fall in jobs of a similar proportion to the fall in jobs in the overall UK economy. The majority of the job losses in the low-paying industries, in the period December 2007 to December 2008, occurred in the two largest, retail and hospitality. These industries are sensitive to falling consumer discretionary spending and the decline of the economy into recession. And the fall in jobs is more likely a consequence of the general economic climate than as a result of increases in the minimum wage. Other industries which have experienced job losses are those that have faced a longer-term decline in jobs, influenced by factors that often pre-date the minimum wage, for example manufacturing. Small firms have, so far, only seen a marginal reduction in employment. Some low-paying industries, however, experienced an increase in jobs over the same period. Social care saw the largest rise in the numbers of jobs with other sectors (e.g. security, hairdressing) also experiencing increases. The low-paying occupational-based sector of childcare experienced a rise in employment in the year to the fourth quarter of 2008, while office work experienced a slight fall in employment in the same period.

13 Data continue to show that the minimum wage has had a different impact on each of the low-paying sectors, having a greater impact on some than others. Research shows that the lower increase in the National Minimum Wage in October 2007 has allowed for some restoration of wage differentials.

14 We continue to be concerned that in those sectors where the Government is a major purchaser, it should ensure that businesses receive payments that properly and fully reflect the cost of providing those goods or services. In line with recommendations we made in previous reports, we have recommended that the commissioning policies of local authorities and the NHS should reflect the actual cost of provision, including the National Minimum Wage, when purchasing care from social care providers in the independent sector.

Chapter 4: Particular Groups of Workers

15 We are concerned with groups of workers that contain a large proportion of workers on low earnings and for whom, therefore, the National Minimum Wage is most likely to have an impact on employment. In addition, we have again reviewed the position of other groups of workers who, by the nature of their work, face issues around the application of the minimum wage that are of particular concern to us, for example voluntary workers and those provided with accommodation.

16 From the evidence gathered, we have found that the minimum wage has had a positive effect on the earnings of low-paid groups. For example, the upratings have helped to close the gender pay gap, which has generally reduced since the introduction of the minimum wage. We have also found that the pay gaps for ethnic minority workers and those with work-limiting disabilities have reduced at the lowest deciles. For older workers, we have estimated that those over State Pension age were significantly more likely to be covered by the October 2008 uprating compared with other adults.

17 We have drawn mixed conclusions about whether the labour market positions of these low-paid groups have been affected. Women have seen similar employment and unemployment trends to men since 1999, indicating that the introduction of the minimum wage and subsequent upratings have not had a negative impact on their employment prospects. For ethnic minority and migrant workers, their employment rates have increased faster than their white and UK-born counterparts. There have been less positive results for young people and those with no qualifications, although there may have been other contributory factors.

18 The Government accepted previous recommendations we have made and has updated the guidance on sleepovers, voluntary workers, and unpaid work experience. We welcome this move and will monitor the impact of this updated guidance, along with how the extended exemption from the minimum wage for work trials, from three to six weeks, operates. We hope that the Government will be able to reach and consult with those affected by the operation of fair piece rates as part of its review of this system.

19 Following campaigns from the media and trade unions, the Government has issued a consultation on proposals to no longer allow employers to use tips to make up minimum wage pay. We have responded to this consultation, and we will carefully monitor the changes to the law that are eventually introduced. The accommodation offset continues to be of concern to stakeholders and we look forward to receiving more detailed information on this next year so that we can better understand its impact.

Chapter 5: Young People

20 We have always made the case that young people should be treated differently to their older counterparts. In reviewing the evidence again this year, we have continued to make a distinction between 18–21 year olds and 16–17 year olds, not least because each group is subject to a different wage floor. We have examined the earnings data for evidence of an impact from the minimum wage and then looked at whether it has affected participation rates in education and employment.

21 The data continue to show that the minimum wage has had a major impact on the earnings of young people. High proportions of young people are paid at the youth and adult minimum wage rates, and earnings at the lowest decile remain at least level with the minimum wage. The evidence suggests that the worsening labour market position of young people did not result from any detrimental impact from the minimum wage. For the latest 2008 uprating it is difficult to distinguish between a possible impact from the minimum wage and that from the recession. Young people have continued to do less well in the labour market than older workers and are particularly vulnerable in an economic downturn. Therefore, we believe that lower National Minimum Wage rates for young people are still justified in order to protect employment and at the same time reflect the training element attached to younger workers.

22 We continue to believe, however, there is a case for starting the adult rate at age 21. We recommend again that 21 year olds should be entitled to the adult rate of the National Minimum Wage. We believe this change would have a minimal impact on employers and would not have any marked impact on the employment prospects of 21 year olds.

Chapter 6: Apprentices

23 Following recommendations in both our 2006 and 2007 Reports, the Government included a review of the apprentice exemptions from the National Minimum Wage in the Commission’s work for the 2009 Report. In conducting our analysis we used a range of data and other evidence from various sources, including the current arrangements for apprenticeships in each country of the UK and the pay apprentices receive, although the available data on the latter were almost entirely restricted to England. We also reviewed the current relevant research, added to this with our own commissioned work, and conducted consultation with stakeholders.

24 We found that while average apprentice pay in England was well above the £80 weekly entitlement, it varied greatly by sector, with around ten per cent of apprentices in the early years (childcare) and hairdressing sectors earning less than this level. This raised the issue of a lack of effective enforcement of the existing wage rate. Female apprentices dominate the sectors that have lower average apprentice pay, and there remains a substantial gender pay gap. Apprenticeships do, however, offer those who undertake them the prospect of higher future earnings and better employment prospects. Although there are also longer term paybacks for employers, such as higher productivity, without a discount in the apprentice wage during training there is a danger that employers are less likely to make the investment. Fewer places would result and government targets could be missed.

25 We have concluded that the evidence has remained strong for continuing to give apprentices special treatment under the minimum wage. But, a number of factors have led us to recommend that there should be a change to the current arrangements, and that a minimum wage for apprentices should be introduced. These factors include the changes to public policy on apprentice wages since the minimum wage was introduced, with the contractual entitlement in England and encouragement of payment of particular wage levels in Scotland and Northern Ireland. The latter administration was also considering the introduction of its own minimum wage for apprentices. Our view is that if there is to be a minimum wage entitlement for apprentices set by public authorities, this should be operated under the National Minimum Wage framework. We concluded that effective enforcement of apprentice pay arrangements was important, and that apprentices should be confident of receiving the pay they are due. Having an apprentice minimum wage, within the National Minimum Wage framework and applied across the UK, should help assist in this goal. We require more time and further information, however, to be able to consider adequately, and make recommendations on, the rate and the detailed arrangements. We therefore also recommend that the Government asks the Commission, as part of the work for its 2010 Report, to consider the detailed arrangements for an apprentice minimum wage under the National Minimum Wage framework, and to recommend the rate and arrangements that should replace the existing exemptions, together with the timing for its introduction.

Chapter 7: Compliance and Enforcement

26 We continue to believe that effective enforcement of the minimum wage is essential to show employers that non-compliance will not be tolerated and to show workers that their complaints are taken seriously. While we believe most employers do comply with the minimum wage legislation, we have received evidence again this year of workers who have been exploited. In many cases these workers are migrant workers and are, therefore, more vulnerable. It remains difficult, though, to obtain a clear picture of the number of workers who are not being paid the minimum wage.

27 We are pleased to note that progress has been made in strengthening the enforcement regime. The additional funding allocated to enforcement in 2006 has enabled the recruitment of a number of additional compliance officers, and another extensive communications campaign has been undertaken this year. We also support the joined-up approach to tackling wider employment abuse through the results of the Vulnerable Workers Employment Forum.

28 April 2009 saw the introduction of a new system of penalties and fair arrears. Although we have been disappointed by the delay in the introduction of these new provisions, we believe that they will strengthen the enforcement regime and bring home to employers the importance of paying their workers their full wage entitlement.

29 Time will be needed to assess the impact of these new provisions. We believe, however, that there are further actions the Government could and should take now that will strengthen the enforcement regime. The number of errant employers prosecuted in a criminal court remains inadequate for it to act as a deterrent to those employers who persistently flout the minimum wage rules. We recommend that the Government allocates sufficient resources to HMRC to increase significantly the number of errant employers prosecuted in a criminal court. As another deterrent to non-compliance, we also recommend that a ‘name and shame’ policy is put in place to expose those employers who show wilful disregard for the minimum wage.

30 We have again received evidence about the ability of those operating in the informal economy to undercut legitimate businesses. During the economic downturn, the lure of the informal economy will become greater, so we recommend that the Government gives urgent consideration to measures that can be taken to effectively tackle employers in the informal economy.

Chapter 8: Setting the Rates

31 In addition to our review of apprentices this year, we have considered the impact of the minimum wage on the economy, the position of those most affected and issues surrounding compliance and enforcement. In our final chapter we turn to the macroeconomic picture and the prospects for the economy in 2009, before setting out our recommendations on the rates and accommodation offset.

32 Since its first recommendations for April 1999, the Low Pay Commission has sought to balance the potential benefits of the National Minimum Wage to low-paid workers against the risk of adverse economic effects. The Commission has taken a cautious approach in difficult times, balanced with more generous recommendations when times were good. Given the scale of the change in the economic climate this year, the Commission asked the Government for a delay in its reporting deadline to allow us access to two months’ additional data, and to conduct further in-house analysis of the current recession.

33 It is clear that the UK faces a significant economic challenge. When we met in March to agree our recommendations, forecasts for GDP growth in 2009 were at -3.1 per cent, down from 2.1 per cent at the time of our last report. The fall in employee jobs since the beginning of the recession is greater than the falls in both the 1980s and 1990s recessions. Consumer spending, vital to hospitality and retail, two of the largest low-paying sectors, has declined sharply since the beginning of 2008. Both sectors, employing around a half of all low-paid workers, are performing worse than the economy as a whole. In discussion about this year’s recommendations, one argument was that the minimum wage should rise in line with forecast average earnings. On the other hand, an argument was also made for a freeze in the minimum wage.

34 These are unprecedented times for the minimum wage and the Commission has concluded that a cautious approach is the only option. We therefore recommend that the adult minimum wage rate should increase from £5.73 to £5.80 in October 2009. We have again recommended that 21 year olds be entitled to the adult minimum wage and believe that the evidence supports this conclusion. After careful consideration we recommend that the relative value of the youth rates to the adult rate should be maintained and recommend that the Youth Development Rate should increase from £4.77 to £4.83 and that the rate  for 16–17 year olds should increase from £3.53 to £3.57. The Government asked us, as appropriate, to consider a recommendation for the minimum wage in 2010. As there is a great deal of economic uncertainty at this time, we do not believe it is appropriate to make a recommendation for 2010. We recommend that the accommodation offset should increase from £4.46 per day to £4.51 per day in October 2009.

35 The Commission is fully committed to ensuring that low-paid workers are treated fairly in these difficult economic times. Our recommendations were made this year in a climate of economic volatility and reflect the difficulty of making a judgement in such conditions. They were shaped by the need to help low-paid workers by protecting their jobs as well as their earnings. The minimum wage has been a huge success for ten years and is there to uphold the principle of fairness whatever the economic climate. After a finely balanced discussion, we reached the conclusion that the evidence pointed to the need for a modest increase.

36 In reaching our conclusions, we took account of a range of labour market forecasts. Our recommendations are based on the expectation that employment levels in the low-paying sectors will fall more sharply than those for the economy as a whole. We are aware that predictions for the growth in average earnings have continued to fall on a month-by-month basis, and so our recommendations are informed by the assumption that current predictions will prove to be too high. Our recommendations are also based on an assumption of falling prices during 2009, which means that even a very modest increase in the rates would lead to a real increase in the living standards of minimum wage workers. Finally, our recommendations are intended to ensure that the National Minimum Wage will broadly keep pace with the modest growth in pay settlements and average earnings forecast for the coming year.

37 The Commission is committed to protecting low-paid workers through the recession. As the Commission works on its 2010 Report this autumn, it will review whether these assumptions were upheld and will take this into account when considering the rates that should apply from October 2010. In doing so, the Commission will pay particular attention to the volatility of the current economic climate and how it can best communicate its thinking to employers and low-paid workers so as to help them with their forward planning.

38 This year’s proposed rates should not be taken as a sign that we will continue to make such modest recommendations. In the period between 2003 and 2006, our evidence-based approach led to a series of increases that outstripped the growth of average earnings, since when our recommendations have become more moderate in order to take account of the higher probability of job loss in the cooling economy. It follows that, when economic conditions improve, the minimum wage could once again increase at a faster rate. In making its recommendations, the Commission’s view will always be driven by the prevailing economic evidence.