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2. Young People and Training >>Back to main report index Young people have benefited from the National Minimum Wage without any discernible negative impact on their employment. There is also no evidence of any adverse impact on the New Deal, on apprentices or on training provided by employers. An age-related Development Rate for young adults lacks equity and our longer-term aim remains to link the Development Rate to accredited training rather than age. To achieve this without risking an adverse impact on youth employment, however, changes must be phased incrementally: we will need to be confident that there will be no adverse employment impact from lowering the age at which the main rate applies. We believe this is already the case for 21 year olds and we recommend once again that they should receive the adult rate; this recommendation is supported by pay data on the lowest-paid young people and on those in new jobs, and by evidence of employer practice. For 1820 year olds we recommend that the age coverage of the Development Rate should be kept under review. We note that take-up of the Development Rate for older workers has been low; we would like to review the merit of continuing this concessionary rate again in the light of future developments. And we will need to make a full assessment of the impact of the National Minimum Wage on those younger workers excluded from it and keep their treatment under review. The relativity between the Development Rate and the main rate has protected employment and training opportunities without any adverse impact on incentives to work. We therefore recommend an increase in the Development Rate in line with the main rate to £3.50 per hour in October 2001 and £3.60 per hour in October 2002. 2.1 Our terms of reference asked us to monitor and evaluate the effect of the National Minimum Wage on young people. In making our recommendations we were asked to pay particular attention to the youth labour market. In addition, the Government asked us specifically to consider whether there was a case for changing the age at which workers become entitled to the adult rate. This chapter sets out our views and recommendations on these matters. 2.2 The treatment of young people has proved to be one of the most challenging issues that we have addressed. We recommended in our first report a youth Development Rate for those aged 1820. We understood and sympathised with arguments that a lower rate based solely on age was not equitable. But our priority was to protect young people's employment prospects and ensure that the lowest-skilled youths were not priced out of the labour market. Data showed that young people's wages were much lower than those of older workers and that young people were more likely to suffer unemployment. We could not ignore the fact that youth unemployment can scar people's employment prospects in later life. And we noted that many other countries eight out of twelve listed in Appendix 6 had lower rates for young people in their minimum wage systems. 2.3 Our first report expressed our longer-term aspiration that the youth Development Rate should be linked to clearly identifiable training. In the meantime we were concerned that the youth Development Rate should apply only to those age groups that need its protection. We were disappointed, therefore, that the Government chose not to accept our recommendation (repeated in our second report) that 21 year olds should be entitled to the full National Minimum Wage. 2.4 We also recommended a Development Rate for older workers who are receiving accredited training in their first six months with a new employer. By the time of our second report it was apparent that the take-up of the older workers' Development Rate was low. But we noted that there were already good examples of how the facility could support employment and training initiatives, and looked forward to more examples in the future. 2.5 Finally, we recommended that 16 and 17 year olds should be exempt from the National Minimum Wage, principally on the grounds that they should be encouraged to remain in full-time education. We also recommended the exemption of apprentices so as not to hinder young people acquiring skills to help them obtain better-paid work. 2.6 In this chapter we consider the impact of our previous recommendations on young people and whether there is a case for any immediate or longer-term changes. We assess data on the pay, employment and skills of young people, and examine the views of employers, unions and youth organisations. We consider whether the factors that justified our previous recommendations still apply and look at the impact of the current arrangements on government initiatives such as the New Deal. From this analysis, we are able to present a longer-term vision of what we believe is the appropriate way to treat young people once the labour market permits. 2.7 The terms of reference for our third report also asked if there was a case for increasing the Development Rate and, if so, by how much. We conclude that there is, and set out our assessment of the likely impact of our recommendation. Impact Beneficiaries 2.8 In Volume 1 of this report we examined the changes in the Office for National Statistics (ONS) methodology for estimating the numbers in low pay. We explained that, as a result of these changes, the numbers had been revised downwards again and that the latest estimate is that workers in 1.3 million jobs benefited from the introduction of the minimum wage. Of these around 105,000 were young people aged 1821. A slightly smaller number around 100,000 benefited from the June 2000 uprating to £3.20 per hour for 1821 year olds. 2.9 Data show that the composition of those affected by the youth rate was different from those affected by the adult rate. About 46 per cent of 1821 year olds affected were men and 54 per cent were women whereas nearly three-quarters of beneficiaries of the adult rate were women. And beneficiaries were equally split between those in part-time jobs and those in full-time work whereas two-thirds of adult beneficiaries were in part-time jobs. This is interesting given that a higher proportion of young people work part time than do older workers, so we might expect a larger proportion of younger beneficiaries to be part-time workers. But the opposite occurs because wages for young people are more equal across hours of work than for older workers. Earnings 2.10 Figure 2.1 demonstrates that a significant number of young people towards the bottom of the earnings distribution have seen their pay rise over the past two years. It also shows that the shape of the earnings distribution has changed markedly. In 1998 the earnings distribution for young people had no obvious spikes and resembled the more traditional 'bell' shape. After 1998, clear spikes in the distribution became discernible. In 1999 there was a large peak of hourly earnings at £3.60. This continued into the following year but, in addition, another peak at around £4.00 per hour emerged in the data for 2000. These developments are likely to be a result of both the National Minimum Wage setting a wage floor and the tight labour market forcing firms to increase wages above the minimum in order to stay competitive. We noted in Volume 1 a similar pattern for adult workers aged 22 and over. Figure 2.1 Hourly Earnings Distribution for Those Aged 1821, April 1998April 2000 
Source: ONS, Central estimate methodology 2.11. Figure 2.2 shows that earnings growth for 1821 year olds is particularly marked for those towards the bottom of the distribution. For example, fewer than 200,000 1821 year olds now earn less than £3.60 per hour compared with just over 400,000 in 1998. Figure 2.2 Cumulative Hourly Earnings Distribution for Those Aged 1821, April 1998April 2000 
Source: ONS, Central estimate methodology 2.12 Figure 2.3 shows that the aggregate earnings of young people rise with age, particularly median earnings. Lowest decile earnings, which are more directly relevant to the minimum wage, are much flatter across young people's ages and are considerably above minimum wage levels: around £3.65 per hour for 20 year olds rising to £3.80 per hour for 22 year olds at April 2000. Figure 2.3 Median and Lowest Decile Earnings of Young People, 2000 
Source: LPC Calculations, Grossed NES and LFS data 2.13 Figure 2.4 shows that the proportion of young people paid below £4.00 per hour has reduced in each of the last three years, with a particularly marked decrease in the year leading up to the introduction of the minimum wage. Figure 2.4 Percentage of Age Group Earning Less Than £4.00 per hour, 19982000 
Source: LPC Calculations, Grossed NES and LFS, 19982000 2.14 As well as looking at the impact of the minimum wage on young people of different ages, we found it helpful to look at other distinctions between young people. The youth labour market is characterised by two distinct groups: students and non-students. Half of full-time students work in the wholesale/retail sector and another quarter work in hotels and restaurants, whereas non full-time students work in a much wider variety of sectors. Students tend to have lower average hourly earnings than non-students, so we might expect the impact of the minimum wage on the former group to be greater. Labour Force Survey (LFS) data indicate that this has been the case. In 1998 median student hourly earnings were 90 per cent of non-student earnings. By April 2000 this proportion had risen to 92 per cent. The impact on lowest decile earnings has been even more marked. Between 1998 and 2000 the lowest decile student/non-student pay gap narrowed by 6 percentage points, so that by April 2000 lowest decile earnings for students and non-students were almost equal. | ||||||||||||||||||||||||||||||
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Employment 2.15 Since the Commission was appointed, we have been particularly concerned about the impact of the National Minimum Wage on youth employment. In the first volume of this report we noted that the minimum wage was introduced in a period of strong employment growth and a tight labour market. In the year following the introduction of the minimum wage, growth in the employment rate of 1821 year olds was more than twice the average for the working age population as a whole: 1.6 per cent compared with 0.7 per cent for all under pension age. As a result, as Figure 2.5 shows, 1821 year olds' share of all employment (after controlling for population changes) increased between Spring 1999 and Spring 2000, largely at the expense of workers aged 35 and over, although the share of employment taken by 2224 year olds also fell. These data suggest that the minimum wage had no adverse effects on aggregate employment for 1821 year olds, and may be indicative of a mild substitution effect towards this age group. Figure 2.5 Change in Age-specific Employment Shares, Spring 1999Spring 2000 
Source: LFS data, Spring 1999 and 2000 2.16 But we noted in Volume 1 that the aggregate data do not tell us what employment would have been in the absence of a minimum wage. In order to test whether employment might have been even higher, we need to construct a model that controls for the minimum wage and other factors associated with individuals' employment opportunities. Research we commissioned (Stewart, 2001) constructed such a model and found that young people's employment had not been adversely affected post-minimum wage. In fact, the results were, if anything, mildly positive for both young men and young women. We were encouraged by this, particularly in the light of recent evidence from other countries which suggests that vulnerable groups such as young people are more likely to experience adverse employment effects from minimum wages. 2.17 Although the aggregate data showed an overall improvement in the labour market performance of young people, we noted that in some sectors young people's employment or conditions of service had been reduced. Research we commissioned to examine the effect of the minimum wage on small and medium-sized enterprises (Heyes and Gray, 2001) found some cases where hours and employment had been cut, but the majority of firms reported no change. Hours and employment of 1821 year olds were less likely to be reduced than those of older workers. 2.18 Our survey of employers asked whether firms had adjusted overall employment in response to the minimum wage. We found that firms with at least half their staff aged 1821 were more likely to reduce staffing levels or reduce hours than those which employed a larger proportion of older workers. Around half of firms employing predominantly young people undertook these measures compared with around a third of other firms. The incidence of these adjustments was generally much larger than those reported in other evidence we received. This may be due to the nature of the sectors sampled, and those responding may be more likely to be those experiencing difficulties. 2.19 We considered evidence on possible substitution effects. The minimum wage could potentially lead to the substitution of younger for older workers because the lower rates for young people make them more attractive to employers. Alternatively, the differential between the main rate and the Development Rate may not be sufficient incentive for employers to use younger workers, so substitution could work against young people. The aggregate data in Figure 2.5 are indicative of a possible substitution effect towards 1821 year olds, but other factors such as New Deal effects, the increasing proportion of students in work, and the tight labour market make it difficult to disentangle minimum wage effects. 2.20 We looked at the issue of substitution in more depth by analysing employment changes by sector, and controlling for relative population changes. We show these in Figure 2.6. Large increases in the share of employment taken by 1821 year olds occurred in the primary (agriculture, fishing and mining), hospitality and retail sectors. These latter two sectors are traditionally associated with low pay and have tended to employ large numbers of young people. The minimum wage may have created a substitution effect towards this age group, particularly in hospitality and retail where 1821 year olds have increased their employment share largely at the expense of the age groups immediately above. Finance is the other major sector where 1821 year olds have increased their share of employment. This is less likely to be minimum wage-related because it is generally higher-paying, and the share of employment taken by 2224 year olds has also risen since the minimum wage was introduced. Figure 2.6 Change in Age-specific Employment Shares by Sector, Spring 1999Spring 2000 
Source: LFS data, Spring 1999 and 2000 
Source: LFS data, Spring 1999 and 2000 2.21 Research we commissioned (Dignan, 2001) looked for evidence of a substitution effect among firms in low-paying sectors. The study found that the minimum wage made little difference to employers' recruitment of under 18 and 1821 year olds. Only 3 per cent of firms said they were more likely to employ those aged under 18, and 7 per cent reported they were more likely to switch to 1821 year olds. None of these adjustments was considered to be major. In our survey of employers, a significant proportion stated that the youth Development Rate maintained or increased employment and training. Table 2.1 shows that around 37 per cent of employers who used the Development Rate believed that it had maintained employment and a further 5 per cent stated that it had increased employment. | ||||||||||||||||||||||||||||||
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2.22 Our survey of firms also asked whether employers were more likely to employ workers who are exempt from the minimum wage or who can be paid the lower Development Rate. Table 2.2 shows that those employers most likely to employ workers who are exempt are in hairdressing, which is also the sector that uses the youth Development Rate the most: 45 per cent of firms compared with 18 per cent across all sectors. | ||||||||||||||||||||||||||||||
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2.23 The strong employment performance of young people post-minimum wage has been reflected, but to a lesser extent, by falling unemployment. In the year since the minimum wage was introduced the unemployment rate of 1821 year olds fell faster than that for all workers: 0.7 percentage points compared with 0.5 percentage points. Figure 2.7 shows the sharper fall in the number of 1821 year olds becoming unemployed compared with the more steady fall of those aged 22 and over. Unemployment durations have continued on a downward path post-minimum wage for both 1821 year olds and for those aged 22 and over. Figure 2.7 Percentage of People Moving Into Unemployment from One Quarter to the Next (4 Quarter Moving Average), 19932000 
AW (Autumn/Winter) SS (Spring/Summer) Source: LFS Longitudinal data, 19932000 Note: Due to measurement error, the proportions of people changing status are likely to be biased upwards, while the proportions not changing status are likely to be biased downwards. Skills 2.24 The youth labour market is strongly influenced by trends in full-time education (FTE). At Spring 2000, three-quarters of all 1617 year olds and around a third of 1821 year olds were in FTE. The last fifteen years or so have seen an expansion in the proportion of young people staying in FTE, and these trends have mostly continued since the introduction of the National Minimum Wage. The exception is among 2021 year olds, whose participation in FTE declined by 2.6 percentage points in the year after the minimum wage was introduced. This group, particularly those who are men, appears to be moving into work or seeking work instead. This could be indicative of the minimum wage, together with other policies, acting as an incentive to work for this group. 2.25 Along with the trend towards higher FTE rates, the proportion of young people who are working while studying is also increasing, and this trend has continued post-minimum wage. As Figure 2.8 shows, between Spring 1994 and Spring 2000 the proportion of students who also work increased by around 10 percentage points across each of the age groups shown. Figure 2.8 Percentage of Young People in Both Full-time Education and Employment, 19942000 
Source: LFS data, Spring 1994, 1998 and 2000 2.26 The most vulnerable young people in the labour market are those who left FTE with few or no qualifications: they are most likely to experience unemployment and low pay throughout their working lives. At Spring 2000, for example, the employment rate of 1621 year olds not in FTE but who had GCSE qualifications was 80 per cent compared with 54 per cent for those with other or no qualifications. We are concerned that the minimum wage should not have a negative effect on these most vulnerable groups. These are the people we had in mind in making our original recommendation for a youth Development Rate. 2.27 Figures 2.9 and 2.10 show the mixed labour market effects for young people by qualification level. There is a clear distinction between 1819 year olds who have GCSE level qualifications and those who have not. For the former employment rose and unemployment fell post-minimum wage, while the reverse was true for those with other or no qualifications. Some of the rise in unemployment among the least-qualified 1819 year olds has been due to more of this group moving into the labour market (the inactivity rate fell by 1.2 per cent). This may be indicative of a positive labour supply response to the minimum wage together with welfare to work initiatives. The employment performance of 2021 year olds has been stronger than that of 2224 year olds. Those aged 2021 with other or no qualifications appear to have fared better than those with GCSE qualifications post-minimum wage their employment rate rising over the period. But total employment among the least qualified 2021 year olds actually fell over the year the rise in their employment rate can be explained by a faster fall in their overall numbers, rather than a surge in employment among this group. The opposite is true for those with GCSE qualifications although total employment rose, the number of 2021 year olds with GCSE qualifications rose faster resulting in a falling employment rate. The expansion in numbers of more highly qualified 2021 year olds appears to be driving this slightly surprising result. Figure 2.9 Change in Employment Rate for Young People not in Full-time Education by Qualification Level, Spring 1999Spring 2000  Source: LFS data, Spring 1999 and 2000 Figure 2.10 Change in Unemployment Rate for Young People not in Full-time Education by Qualification Level, Spring 1999Spring 2000  Source: LFS data, Spring 1999 and 2000 2.28 There has been considerable research on the cycle of low-pay and no-pay (see, for example, Stewart, 2000) showing that a spell of low-pay or no-pay can persist and scar people's future employment prospects. Because young people have higher unemployment rates than adults, we are particularly concerned to avoid adding to any scarring effects. Data on inflows into unemployment show that young people have a greater propensity to become unemployed than adults, so churning is higher. But there is some evidence to suggest that voluntary moves into unemployment among young people might be higher than among adults. Young people are more concentrated among low-paying sectors which tend to have high turnover rates. In addition, young people are more likely to sample a number of jobs 'job shop' before settling on a chosen career path. These factors, rather than that they are intrinsically more likely to quit than adults, might explain their higher inflow rates into unemployment. Hence some of the churning experienced by young people is voluntary and is unlikely to lead to damaging scarring effects and a cycle of no-pay and low-pay. The scarring effects of unemployment on young people may, therefore, not be as severe as those indicated by data on unemployment flows alone. 2.29 In conclusion we noted that 105,000 young people benefited from the introduction of the minimum wage, and there has been a clear upward shift in the earnings distribution of young people. We have not detected an adverse employment effect for young people at the aggregate level. In fact, 1821 year olds increased their share of all employment in the year to April 2000. There was some evidence, from both the survey data and from our research, of a mild substitution effect towards younger people. Other evidence showed that youth employment and hours had been cut in some sectors as employers adjusted to the new minimum. At the aggregate level, unemployment among young people has continued to fall post-minimum wage. There have been mixed effects for groups that are particularly vulnerable, especially those with the fewest qualifications. Some of these groups, particularly the youngest with few or no qualifications, saw a worsening labour market performance post-minimum wage. Not all of this is minimum wage-related as some of these trends were established pre-minimum wage. We are concerned about the possible scarring effects on young people, but are encouraged that these may not be as severe as indicated by data on youth unemployment alone, as a significant proportion of flows into unemployment are likely to be voluntary movements. Training Government Initiatives 2.30 We framed our recommendations in our first two reports to complement the Government's initiatives to improve the position of young people in the labour market. These initiatives aim to improve skills and employability, as well as to increase incentives for young people to find work and incentives for employers to recruit them. Moreover, they are a key part of the Government's strategy to further the development of the knowledge-based economy in the UK. 2.31 We are concerned that those responsible for education, employment and training strategies should recognise the minimum wage as a positive tool that can help achieve broader objectives. We remain concerned that not enough young people go into coherent work-based training provision to ensure that they do not end up in low-paid jobs with neither qualifications nor portable skills. There has been significant progress, but the challenge to do more remains. We recognise the important contribution already made by apprenticeship schemes and the New Deal in developing the skills and employability of young people. We therefore considered carefully the impact of the minimum wage on apprentices and on those participating in the New Deal. | ||||||||||||||||||||||||||||||
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2.32 Apprenticeship schemes are a means for young people to improve their skills and employability. Numbers of both Foundation and Advanced Modern Apprenticeships (previously National Traineeships and Modern Apprenticeships) increased in England and Wales in the year to September 2000 (Labour Market Trends, February 2001). In particular, the number of Foundation Modern Apprentices increased from 61,000 to 96,000. 2.33 The use of apprentices varies across low-paying sectors. Hairdressing has been a particularly significant user of apprenticeship schemes, with about 10 per cent of employees being apprentices. They are a much lower proportion of the workforce in sectors such as hospitality and retail. 2.34 LFS Spring 2000 data indicated that for apprentices aged 1625 the lowest decile hourly rate was £2.66 and the median hourly rate was £4.19. The apprentices with the lowest hourly rate were likely to be the youngest. First-year pay for the youngest apprentices could be as low as £50 per week in hairdressing. Apprentice pay varied considerably in most sectors: it often started well below the current Development Rate level but rose significantly year by year. The low first-year pay for apprentices usually reflected the extent to which they were in training rather than in productive work. 2.35 We concluded that the National Minimum Wage did not appear to have had an adverse impact on apprentices. The overall number of apprenticeships, particularly Foundation Modern Apprenticeships, has increased encouragingly over the past couple of years. At the same time the minimum wage has provided a wage floor for apprentices aged over 18 in their second and third years. 2.36 In November 2000 the Government announced that it had helped 250,000 young people off welfare and into work. The Government wrote in its evidence that 'the number of young people going into both unsubsidised and subsidised jobs through the New Deal has continued to rise. We are not aware ... that the NMW is putting employers off.' Employment Service data show that the number of 1824 year olds moving into employment as a result of the New Deal is consistently above 20,000 a quarter. 2.37 We conducted a survey of New Deal employers (details in Appendix 5) to see whether the National Minimum Wage had an effect on the employment prospects of employees. The vast majority (89 per cent of smaller businesses and 93 per cent of larger businesses) paid New Deal workers the same as other employees and said that the minimum wage had not changed their willingness to take on or retain New Deal employees. Of smaller businesses, over 80 per cent said that it made no difference or had increased their willingness to take on unsubsidised employees; 98 per cent of larger businesses said it had made no difference. The figures for the impact on employer willingness to take on subsidised employees were even more positive. 2.38 In short, evidence from employers and the Government, and the results of our survey of New Deal employers, suggest that the introduction of the National Minimum Wage has not had an adverse effect on the New Deal. Training by Firms 2.39 As well as looking at the impact of the National Minimum Wage on government training schemes, we looked at its impact on training by firms. The increased costs of the minimum wage may give employers a greater incentive to improve the productivity of staff through training. Alternatively, increased wage costs may reduce the amount of money available for employers to spend on training. We noted in Volume 1 of our report that results from academic studies have been ambiguous, with some suggesting that minimum wages increase training and others finding the opposite. 2.40 In Volume 1 of our report, we considered the aggregate evidence on employers' use of training. Our conclusion from the aggregate data was that the minimum wage had not reduced participation in FTE and apprenticeship schemes and that, for the most part, the upward trends established before its introduction had continued post-implementation. 2.41 Looking in more detail at training provision across different ages, LFS data show that employers' provision of job-related training increased slightly in the year after the minimum wage was introduced. Figure 2.11, which shows the proportion of employees by age receiving job-related training in the past thirteen weeks, indicates that training provision overall rose from 29.2 per cent to 29.7 per cent between Spring 1999 and Spring 2000. Most age groups experienced an increase or remained flat post-minimum wage. As Figure 2.12 shows, this trend was mirrored when looking at training in the previous four weeks. The proportion of 1821 year olds receiving training in the previous four weeks rose by 0.7 percentage points, the largest rise of those groups shown. The aggregate data therefore suggest that job-related training, including that among young people, has not been adversely affected by the minimum wage. Figure 2.11 Percentage of Employees Receiving Job-related Training in the Previous 13 Weeks, 19992000 
Source: LFS data, Spring 1999 and 2000 Figure 2.12 Percentage of Employees Receiving Job-related Training in the Previous 4 Weeks, 19992000 
Source: LFS data, Spring 1999 and 2000 2.42 The aggregate picture does not tell us how firms particularly affected by the minimum wage have adapted. We therefore supplemented the household data with our commissioned research and evidence. Heyes and Gray (2001) analysed the impact of the minimum wage on training and employment in small firms. As Figure 2.13 shows, they found that wage increases granted to young workers aged 1821 in response to the minimum wage had little effect on training offered to them by employers or on opportunities to gain qualifications. There was some evidence of a reduction in the duration of training offered to young people. But the difference between those who said that they had reduced the duration of training and those who had increased it was small: 8 per cent compared with 5 per cent. Figure 2.13 Effect of the Minimum Wage on Employers' Provision of Training for Workers Aged 1821 
Source: Heyes and Gray, 2001 2.43 The research undertaken for us in Northern Ireland by Dignan (2001) reported little or no effect on training provision for young people. Of the 30 firms asked about their training and development provision for young people post-minimum wage, only 2 said that it had been cut. These firms were in retail and hospitality. The more intense focus group research found that none of the participants said they had experienced less training as a result of the minimum wage. Continued... | ||||||||||||||||||||||||||||||
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