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2. Young People and Training -Continued >>Back to main report index Different Age Groups 2.44 Finally, we looked at the impact of the National Minimum Wage on specific age groups: 16 and 17 year olds, 1821 year olds, and older workers. We considered how the arrangements for these groups were working and if there was a case for change. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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16 and 17 Year Olds 2.45 In a number of respects 16 and 17 year olds are distinct from older workers. Their pay is lower, their participation in education higher, they are more likely to work part time, and they work in a much narrower range of sectors (particularly retail and hospitality). LFS data for Spring 2000 show that for 16 and 17 year olds the lowest decile hourly pay rate was £2.77 and the median rate was £3.83. The same data indicate that approximately 13 per cent of 16 and 17 year olds earned below £3.00 per hour in Spring 2000. 2.46 Over the past decade there has been a significant increase in working part time among 16 and 17 year olds in education. While there are benefits for young people in combining work with education, we are concerned that there might be implications for the educational attainment of very young workers in the longer run. Those 16 and 17 year olds who are not in education should be in receipt of in-work training. We would not wish to do anything which encourages young people not to take up study or training opportunities. 2.47 There was considerable strength of feeling among trade unions, Low Pay Units, youth organisations and others that 16 and 17 year olds should be entitled to a statutory minimum wage. Some organisations argued, on principle, that the full National Minimum Wage should apply at age 16. The National Union of Students wrote that 'employees should receive equal pay for equal work and ... a single rate would prevent job opportunities for older people from being undermined. NUS therefore advocates ... equal provision for all workers over the age of 16.' 2.48 In our visit to Scotland young people told us of employers freezing, or even reducing, the pay of 16 and 17 year olds to fund pay rises for older workers. The TUC evidence reported that 'one chain of shops in the North West has changed its policy to avoid the NMW by deciding that it will employ only under 18s as assistants'. The Amalgamated Engineering and Electrical Union evidence indicated that 'there is some evidence of the dismissal of 17 year olds prior to their 18th birthday to avoid paying them the NMW'. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2.49 A survey of mainly hospitality and retail firms in Yorkshire and Humberside by Heyes and Gray (2001) found some evidence of substitution by employers towards 16 and 17 year olds. Twenty one per cent of respondents said that the exemption of this age group had led to an increase in the number of 16 and 17 year olds employed; in a substantial majority of these cases fewer older workers were being employed. But Heyes and Gray also found that reducing hours and employment were far more important overall in containing labour costs than substitution. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2.50 The Government evidence claimed that 'no longer can an employer legally pay his workers as little as £1 or £2 an hour'. There are, however, reported examples of this happening to 16 and 17 year olds. The Welsh Affairs Committee recently reported (Third Report of Session 19992000, 2001) that 'we were told that young people were frequently paid as little as £2 an hour and that some employers would only employ young people in order to avoid having to pay the minimum wage'. Such examples of very low pay rates for 16 and 17 year olds add strength to the case of those who argue that the National Minimum Wage should cover this age group. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2.51 There are counter arguments. The overwhelming majority of 16 and 17 year olds are in full-time education, part-time education or work-related training. We pointed out in our second report that the additional Government initiatives aimed at 16 and 17 year olds had reinforced our view that they should not be considered full-time participants in the labour market. The introduction of the Right to Time Off for Study or Training has enabled 16 and 17 year olds who are not in full-time education, and who have not achieved NVQ level 2 or equivalent, to take 'reasonable' time off for study paid at their normal rate. Certain provisions of the Young Workers Directive, which the Government is implementing, will result in new working time limits for 16 and 17 year olds. The Directive requires limits to hours of work of 8 per day and 40 per week and places restrictions on night work. This compares with a limit of 48 hours a week for older workers under the Working Time Directive. We have also noted that many 16 and 17 year olds rely on in-work training and experience for developing the skills needed for their future career, and we are concerned about the effect of increasing employer costs on such opportunities. We are encouraged by the increased numbers of 16 and 17 year olds in FTE, and we would not want to recommend any changes that would damage longer-term employment and training opportunities for this age group. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2.52 Nonetheless we acknowledge that any significant substitution effects arising from the current arrangements would be a cause for concern. We are also concerned about the examples of very low pay received by some 16 and 17 year olds. Hence, we believe that we need to keep the treatment of this age group under review, with a view to assessing the case for extending some kind of protection to this group in the future. But to do so we need to look at the impact of the minimum wage on 16 and 17 year olds over a longer period. This will need further research and analysis of the impact of the minimum wage on the labour market for teenagers. 1821 Year Olds 2.53 Whereas 16 and 17 year olds are exempt from the National Minimum Wage, 1821 year olds are protected by a lower minimum wage rate, the youth Development Rate. Earlier in this chapter we showed that the minimum wage has had a positive impact on 1821 year olds' pay while employment has continued to grow. We now consider how 1821 year olds should be treated under the minimum wage: if there should continue to be a youth Development Rate and, if so, to what ages it should apply. 2.54 In considering the need for a youth Development Rate, we looked carefully at the pay of 1821 year olds and the extent to which employers used the lower rate. Research we commissioned (see, for example, IDS, 2000b), our own employer survey, written and oral evidence from employers, and visits we made throughout the country all confirmed that adult rates are generally paid at age 18. This was particularly characteristic of sectors where large numbers of young people are employed, such as retail, fast food, public houses and cafes. Our survey of employers in low-paying sectors found that only around 12 per cent of all employers in the sample had age-related pay scales for workers above age 18. Fewer than 5 per cent of all employers applied an adult rate above age 21. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2.55 Overall, only 18 per cent of respondents to our survey said that they used the youth Development Rate. Smaller businesses were less likely to pay an adult rate until age 21, which may reflect the fact that pay was lower in smaller firms. Some employers used the Development Rate as an induction rate rather than an age-related rate, and other employers used it simply because they had a policy of paying the legal minimum for the job.
2.56 Although evidence from firms suggests that a relatively small proportion of employers use age-related scales, aggregate data show that median earnings rise with age. This is probably because pay reflects length of service and experience, but it may also be a consequence of the distribution of young people in the labour market. They tend to be employed in lower-paying sectors, and as age increases the proportion of them in low-paying sectors falls. 2.57 The impact of sectoral employment patterns on the pay of young people can be illustrated by considering how the aggregate pay level could rise by age even if pay rates by age within individual firms were equal. Figure 2.14 shows a distinct fall in the proportion of employees in the low-paying sectors by age, and a rise in the proportion in the high-paying sectors. This is compatible with the micro-economic evidence from firms suggesting a move towards flatter pay structures within firms and a rise in aggregate pay by age. Figure 2.14 Percentage of Young People Employed in 'High', 'Medium' and 'Low' Paying Sectors by Age, 2000 
Source: LFS data, Spring 2000 Note: Low-paying sectors are retail, hospitality, construction, and other community and social services. High-paying sectors are finance, transport and education. Medium-paying sectors are all others. 2.58 Another factor in the low pay of young people is that they are more likely to be on induction rates than older workers because of their higher job turnover rates. In some sectors, the youth Development Rate has been used as an induction rate rather than being linked to age-related pay scales. According to IDS (2000b), induction rates have been widely used in retail and also in hospitality. Employers there justified the use of an induction rate by referring to the lower productivity and responsibility of new employees, and the need for greater supervision and training. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| 2.59 Although we have explained the reasons for some of the difference between the pay of younger and older workers, we still need to be careful in making our recommendations on the youth Development Rate. We need to balance our assessment of the reasons for the low pay of young people with the evidence from our employer survey and consultation about the protection the youth Development Rate provides for employment. 2.60 We asked for views on the youth Development Rate and for evidence of its use. The CBI's Employment Trends Survey 2000 found that, of those employers who had taken action as a result of the National Minimum Wage, 26 per cent had made use of the youth Development Rate. Some sectors had many employers who use the Development Rate widely and whose representatives claim that it is essential for their viability. For example, the Hairdressing Employers Association told us that 'hairdressing salons use the Youth Development Rate extensively' and argued for its continuation. The sectors that supported the youth Development Rate were, as we would expect, generally those that traditionally employ large numbers of young people. Of those employers who disagreed with the youth Development Rate many were in sectors which employed relatively few young people. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2.61 The youth Development Rate provoked strong arguments about equity. We received representations about people not getting the rate for the job. Trade unions, youth organisations and the Low Pay Units generally objected to the youth Development Rate on principle. UNISON wrote that it believes 'young workers should be paid the rate for the job and that the lower youth rate provides no guarantees of training from employers'. Some employers also argued that there was no justification for a lower rate for young adults, principally on the grounds of equity and the social norm that adulthood begins at 18. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2.62 We also received representations that the youth Development Rate creates the potential for younger workers to substitute for older workers. The British Youth Council wrote that 'a lower rate based on age instead of training ... encourages the employment of young workers on short-term contracts as cheap labour, displacing more expensive older workers'. 2.63 The TUC argued that employers would have more incentive to train young workers if the lower rate was linked only to accredited training. In jobs that require minimal training it questioned why an 18 year old should be less productive than a 22 year old. A lower rate might be seen as a signal that young people do not need to be as productive as adults. The TUC also noted that employers are increasingly phasing out age-related rates. 2.64 We take seriously the concerns of those opposed to the youth Development Rate. We remain concerned that the youth Development Rate is not equitable and believe, in principle, that workers who do the same job should receive the same pay regardless of age. But we consider that comparisons are difficult and more research is needed to attempt to establish whether young people who are paid less than older colleagues genuinely have the same responsibilities. In addition, as well as equity, we have to consider the impact of removing the Development Rate on youth employment. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2.65 Hence we remain cautious. International evidence suggests that if any negative effect is associated with a minimum wage, it is associated with young people. Our employer survey found that significant numbers of employers using the Development Rate said it helped maintain or increase employment. The removal of the youth Development Rate at this stage would increase costs significantly in some businesses which employ large numbers of young people. And this might have negative employment effects which could, in turn, increase social exclusion among young people. v 2.66 In making our recommendation we assessed the impact of the current Development Rate on youth employment and concluded that, at its present level, there do not appear to be any adverse employment effects on young people at the aggregate level. Indeed, at the aggregate level we found that the employment share of 1821 year olds was increasing. As discussed earlier in this chapter, youth employment has continued to rise, and work by Stewart (2001) found no adverse impact on youth employment at the individual level. Moreover, we found evidence of mild substitution in favour of 1821 year olds. Surveys showed that firms were more likely to employ young people as a result of the National Minimum Wage and the youth Development Rate. So the youth Development Rate appears to have helped protect the employment of young adults. 2.67 At present, 18,19 and 20 year old workers are different from older workers in a number of respects. This is illustrated in Figure 2.15 which shows how lowest decile pay the pay of those most likely to be affected by the National Minimum Wage increases by age. But we do not believe that an age-related lower rate is necessary for those aged 21. The data on lowest decile pay, the most relevant data on earnings in new jobs (particularly for non-students), the declining numbers of 21 year olds earning below the full minimum wage, and evidence from employer practice all support including 21 year olds in the main rate. Figure 2.15 illustrates that 21 year olds are slightly closer to 22 year olds than to younger workers in respect of their lowest decile pay. At Spring 2000, lowest decile earnings were £3.64, £3.74 and £3.81 for 20, 21 and 22 year olds respectively. Figure 2.15 Lowest Decile Earnings of Young People, 2000 
2.68 Figures 2.16 and 2.17 give the percentage of new jobs paying at least £3.85/£3.95 per hour the April 2000 value of £4.10 by age using LFS and NES data respectively. The LFS data relate to the earnings of those who started their current job in the past six months. The NES data relate to those who started their current job in the past twelve months. The LFS data are therefore more likely to represent earnings of entry jobs. They show that a higher proportion of 21 year olds had new jobs which paid at least £3.85/£3.95 per hour than both 20 year olds and 22 year olds. At Spring 2000, 87 per cent of 21 year olds earned at least £3.85 per hour compared with 81 per cent of 22 year olds and 77 per cent of 20 year olds. The NES data are less pronounced for 21 year olds and show a steady increase in the proportion of jobs paying at least these amounts by age. Figure 2.16 Percentage of New Jobs Paying at Least £3.85/£3.95 per hour by Age, 2000 (LFS Data) 
Source: LFS data, Spring 2000 Note: The figure uses £3.85/£3.95 as this represents the April 2000 value of our recommended £4.10 per hour main rate for October 2001. Figure 2.17 Percentage of New Jobs Paying at Least £3.85/£3.95 per hour by Age, 2000 (NES Data) 
2.69 Figure 2.18 shows that for non-students there is an even more pronounced effect for 21 year olds, with 91 per cent moving into new jobs earning at least £3.95 per hour compared with 74 per cent of 20 year olds and 81 per cent of 22 year olds. Figure 2.18 Percentage of New Jobs Paying at Least £3.85/£3.95 per hour for Non-students by Age, 2000 
Source: LFS data, Spring 2000 Note: The figure uses £3.85/£3.95 as this represents the April 2000 value of our recommended £4.10 per hour main rate for October 2001. 2.70 Figure 2.19 shows how the proportion of jobs paying less than the full adult minimum wage (using the upper bound April 2000 value of £4.10) has changed over time. The proportion of 21 year olds earning less than £3.95 per hour fell by nearly a third between 1998 and 2000. The largest reductions in the proportion of jobs below this level (represented by the gap between the top and bottom lines in the figure) were seen for the younger age groups. Figure 2.19 Percentage of Jobs Paying Less than £3.95 per hour by Age, April 1998April 2000 
Source: LPC Calculations, Grossed NES and LFS data 2.71 We explained earlier in this chapter that part of the explanation for the relatively low pay of young people is that they are more concentrated in low-paying sectors. In making our original recommendation that 21 year olds should be included in the adult rate, we placed considerable weight on employer practices. We continue to do so. Table 2.3 below shows that only 4 per cent of firms responding to our survey applied their adult rate at age 22 and that most employers with age-related pay paid their adult rate from the age of 18. Most of the employer evidence we received for this report continues to support including 21 year olds in the adult rate, confirming that our original recommendation reflected labour market practice. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2.72 We reached a unanimous view that the arguments for entitling 21 year olds to the main, or adult, rate of the National Minimum Wage are very strong. Median earnings of young people rise steadily with age, but we have shown that this is largely a result of more young people being employed in low-paying sectors rather than employers paying younger workers less than older workers. Lowest decile earnings, which are most relevant for analysing minimum wage effects, of 21 year olds are closer to 22 year olds than 20 year olds. Data on new jobs show that 21 year olds often enter jobs with better pay than 22 or 23 year olds. Our research shows that the vast majority of employers treat 21 year olds as adults. Our research and evidence also show that, at the aggregate level, employment has not been adversely affected. In fact, for young men and women econometric research indicates a mild positive employment effect. We are confident that any risks to employment from 21 year olds being entitled to the main rate are minimal. We therefore recommend that 21 year olds should be included in the main National Minimum Wage. The cost to 21 year olds and, as we shall explain later in this chapter, the cost to employers of such a change would be negligible. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2.73 We will continue to monitor the youth labour market to assess the impact of the recommended change. We want to ensure that the youth Development Rate applies only to those who need its coverage. We believe it is possible that over time the coverage of the Development Rate age band may progressively narrow. But we will recommend such a narrowing only when we are confident that doing so would not have an adverse impact on youth employment or training and that it would be manageable for firms. At future reviews we will need to consider employer practice and the broader labour market, as well as pay and employment data, to assess whether the Development Rate age band can safely be narrowed. As we emphasised in our second report, any increase in the coverage of the adult rate 'would need to be incremental to avoid too great a wage hike and the consequent negative impact on young people's employment'. We therefore recommend that the age coverage of the Development Rate should be kept under review. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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Older Workers 2.74 The original intention of the Commission's recommendation of a Development Rate for older workers was to provide an incentive for employers to train new staff. The recommendation recognised that the acquisition of skills is not just an issue for the young. The Commission was concerned that the difference between this older workers' Development Rate and the main National Minimum Wage should not be so large that it provided a disincentive for people to take up posts with accredited training. The Commission believed that a lower rate for six months struck a balance between the interests of workers and the productivity expectations of employers. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2.75 Take-up of the Development Rate has remained low. Research by Heyes and Gray (2001) found that over half of the small number of employers who used the facility did not have a written training agreement. In some areas use of the facility has declined. IDS (2000b) reported that a number of pub chains who had used the Development Rate when it was initially implemented have ceased to use it. IDS identified several reasons why this had happened:
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2.76 Our own employer survey found that 5 per cent of employers said that they were using the older workers' Development Rate. This low rate of usage was borne out by our discussion with employers on our visits and in taking oral evidence. But of the 5 per cent who used the Development Rate, 40 per cent said it had enabled them to improve the amount of training, or the quality of training, they provided. 2.77 The Hospitality Training Foundation expressed concern that in-house training programmes offered by many employers were not regarded as accredited training. They were 'keen to ensure that all qualifications included in the National Qualifications Framework are recognised by Government as "accredited training". A prerequisite is that they be based on national occupational standards.' We have heard of good examples of in-house training and have a degree of sympathy with this view. Employers and National Training Organisations may wish to address this issue with the Government and the new Learning and Skills Councils. 2.78 Although use of the older workers' Development Rate is very limited, many employer organisations consider that it is valuable and should continue. The CBI believes that 'there could well be more interest in the development rate were the nmw to rise significantly, and therefore the flexibility provided by the development rate should be retained'. Use of the Development Rate might also increase as employer understanding of the facility improves. There may be a case for abolition if low take-up continues, but we need a longer period before we can advise on this issue. Choosing the New Development Rate 2.79 In our first report we wanted the Development Rate, both for younger workers and older workers, to be set 'at a level which provides a sufficiently attractive and affordable first step on a genuine jobs ladder'. In looking at the level of the Development Rate our priority is to protect employment and training opportunities. We are also concerned to keep the National Minimum Wage as simple as possible. Since June 2000, the youth Development Rate has been the same as that for older workers (which is in line with our original recommendations in our first report). Employers and workers have become used to the same Development Rate being applied to young people and older workers (with different eligibility criteria) and we see no reason to change this arrangement. We therefore believe the same increase in the Development Rate should be applied to both younger workers and older workers in October 2001. | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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2.80 Most evidence on the Development Rate addressed whether it should be abolished or retained, particularly for young people. Relatively few people commented on the level. Of those who did, the Biscuit, Cake and Confectionery Alliance, and the Trade Union Research Unit supported a narrowing of the differential. But the British Hospitality Association wrote in evidence that they 'would be concerned if the youth rate were to be increased significantly in 2001. There is a danger that young people could be priced out of the market in some areas.' The Association of Convenience Stores argued that 'a significant differential between the full rate and the youth rate should be maintained'. 2.81 At a little over 86 per cent, the Development Rate already represents a fairly high proportion of the main rate. We reviewed whether it was too high or too low and what the implications of changing it might be. Although the majority of employers do not use the youth Development Rate, and take-up of the older workers' Development Rate is low, employers are now familiar with the relativity between the Development Rate and the main rate. Significantly increasing it as a proportion of the main rate may diminish its usefulness as a labour market tool unless the aim is to abolish it progressively in this way for both younger and older workers. Widening the differential would affect some of the more vulnerable in the labour market, increasing the inequity of being eligible for a lower rate. We do not consider that either of these alternatives would send the right signal. 2.82 The current relativity between the Development Rate and the main rate appears to work well as we explained earlier in this chapter employment and training prospects of young people have not been adversely affected. There seems to be no reason to alter this differential at present. We conclude therefore that the Development Rate should increase in line with our recommendation in Volume 1 on the main rate. Hence we recommend that the level of the Development Rate should be £3.50 per hour in October 2001, and £3.60 per hour in October 2002. Assessing the Impact Coverage 2.83 We explained in Volume 1 that estimating the likely coverage of a new rate in October 2001 is complicated because we do not know with certainty the shape of the future earnings distribution. We therefore adopted two assumptions about the future path of earnings for the low paid: that they would rise in line with average earnings, and that they would rise in line with prices. We further assumed that the numbers employed in the low-paying sectors would remain the same. 2.84 Assuming that earnings of the low paid rise in line with average earnings between April 2000 and October 2001, we estimate the real value of a £3.50 per hour youth Development Rate in October 2001 to be about £3.30 per hour at April 2000 levels. The number of jobs of those aged 1820 below this level is in the region of 115,000, about 9 per cent of jobs for this age group. If we assumed a smaller percentage increase in earnings of the low paid, say in line with prices, then the real value of the minimum wage would be higher, around £3.35 per hour at April 2000. This would represent about 125,000 jobs or 9.7 per cent for those aged 1820. 2.85 It is difficult to make an estimate of the number of 21 year olds who will be affected by our recommendation that they should be eligible for the main National Minimum Wage rate. The latest data we have relate to Spring 2000, 18 months before the recommendation would come into effect. We have made broad assumptions of the aggregate effect of our recommendations, but it is more difficult to look at a single age group in the labour market, such as 21 year olds. The number of 21 year olds eligible for the main rate in October 2001 will be influenced by demographic trends, changes in the employment rate, and trends in earnings. Hence we have not made an estimate of the number of 21 year olds who would benefit. We can say, however, that at April 2000 there were fewer than 30,000 21 year olds being paid below £3.60 per hour. This suggests that the number of 21 year olds who would be affected in October 2001 would be very small. Wage Bill 2.86 We stated in the first volume of our report that predicting the effect of the new rate on the wage bill is not straightforward because we need to make assumptions about earnings growth in the absence of any increase in the rate. As forecasts are always uncertain, we adopted two assumptions which provide an upper and lower bound to wage bill costs. These are the same assumptions as those we adopted for the adult rate. The first is that there is little or no earnings growth at the bottom of the youth earnings distribution, and the second is that youth earnings will grow in line with average earnings. 2.87 In the first volume of this report, we noted that there is evidence of some employees receiving above-average pay increases in order to maintain differentials with those paid at the minimum. It is difficult to identify precisely how far up the earnings distribution such effects stop. We therefore adopted two assumptions on the degree of wage restoration. The first is that wage restoration would be limited to around the 17th percentile (D1); the second is that there would be a continued, but lower, effect up to around the 35th percentile (D2). We were guided by NES data on the percentile increases in earnings for 1821 year olds in determining our assumptions. 2.88 Figure 2.20 shows the direct effect on the youth wage bill of an increase in the minimum wage for 1820 year olds to £3.50 per hour at October 2001 assuming restoration of differentials as detailed above. We estimate that the direct effect of a £3.50 per hour youth Development Rate is between 0.17 and 0.55 per cent of the current youth wage bill, depending on the assumed path of earnings growth. These are higher, in percentage terms, than the increase in the wage bill effect for those aged 21 and above that we estimated in our first volume. But because there are far fewer young people affected the total effect on the wage bill, in cash terms, is much lower. If we assume limited restoration of earnings differentials, this increases the wage bill effect to between 0.31 and 0.76 per cent of the current youth wage bill. Assuming preservation of differentials further up the distribution raises the upper bound to between 0.36 and 0.81 per cent. Figure 2.20 Youth Wage Bill Impact, Minimum Wage of £3.50 per hour, October 2001 
Source: LPC Calculations, Grossed NES and LFS data 2.89 As with our previous estimates, we have put more weight on the lower bound estimates for several reasons. First, although we have assumed compliance is universal, it is unlikely to be 100 per cent. Second, our baseline assumes everyone below the current youth rate receives the £3.20 per hour rate at June 2000, but no further restoration of differentials beyond that. This is likely to understate the baseline and hence overstate the effect of the new rate. Finally, we have assumed that there is no response to the new rate on the part of employers, either in adjusting employment or productivity, which will offset the impact of the increased cost to them. 2.90 In recommending a new rate we took account not just of the impact on the cohort wage bill, but on the sectors and firms most affected. Sectors that predominantly employ young people, and in which wages are the lowest, will be affected most. Figure 2.21 shows the direct effect of the new rate on hospitality and retail, the only sectors with large enough samples to support such analysis. Figure 2.22 shows that the impact on the wage bill for young people in smaller firms will also generally be greater than in larger firms where most young people are employed because young people tend to be lower-paid when employed in smaller firms. Figure 2.21 Youth Wage Bill Impact in Hospitality and Retail, Minimum Wage of £3.50 per hour, October 2001  Source: LPC calculations, Grossed NES and LFS data Note: Assumes earnings of the low paid grow in line with average earnings. Figure 2.22  Youth Wage Bill Impact by Business Size, Minimum Wage of £3.50 per hour, October 2001 Source: LPC calculations, Grossed NES data Note: Assumes earnings of the low paid grow in line with average earnings. 2.91 Building on the results outlined here and in our first volume we can estimate the combined impact of both the new adult minimum wage of £4.10 per hour, and the new youth Development Rate on the aggregate wage bill. In estimating the effect on the aggregate wage bill we have assumed that earnings of the low paid grow in line with average earnings. The direct effect of our recommendations is to increase the aggregate wage bill by 0.1 per cent. Assuming limited effect on differentials (D1) raises this to 0.13 per cent while more pronounced restoration of differentials (D2) increases it to 0.21 per cent. These results are shown in Figure 2.23. 2.92 The increase in the main rate dominates the effect on the aggregate wage bill. The increase in the youth Development Rate has little overall impact; indeed, it adds only around 0.01 percentage points to the impact of the adult rate. This is not surprising since the vast majority of employees are aged 21 or over. Figure 2.23 Aggregate Wage Bill Impact, Minimum Wages of £4.10 and £3.50 per hour, October 2001  Source: LPC Calculations, Grossed NES and LFS data Note: Assumes earnings of the low paid grow in line with average earnings. Conclusion 2.93 Young people have benefited from the National Minimum Wage without any discernible impact on their employment. Youth unemployment has continued to fall and employment to rise. The overall number of apprentices has risen as has the total number of young people who have benefited from the New Deal. Yet the minimum wage has made a real difference to the pay of young people. 2.94 We believe that the youth Development Rate still remains necessary for those aged 1820 to protect their employment prospects. But evidence on employer practices, data on lowest decile pay, and data on earnings in new jobs all support the inclusion of 21 year olds in the main National Minimum Wage. The cost of such a change to 21 year olds' employment prospects and firms' profitability would be negligible. We have made this recommendation in two previous reports and we hope that the Government will now accept the case for including 21 year olds in the main rate. 2.95 We accept that an age-related Development Rate lacks equity. Our longer-term aim, as indicated in previous reports, is that the Development Rate should be linked to accredited training rather than age. To achieve this without an adverse impact on employment and training prospects of young people, changes must be phased incrementally. We would not recommend lowering the age at which the main rate applies until we are convinced that labour market conditions allow us to be confident that there would be no adverse employment impact from such a change. We therefore recommend that the age coverage of the Development Rate should be kept under review. 2.96 We believe that a lower Development Rate has helped to protect youth employment. But there is no evidence of an adverse impact on young people's incentive to work from the lower rate, nor has the level of the Development Rate damaged youth employment. Hence we have recommended that the Development Rate rise broadly in line with the main rate in October 2001 and 2002. We would like to review the continuation of the Development Rate for older workers 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 the treatment of those workers under review. 2.97 The impact of the National Minimum Wage on all groups, including young people, is affected by many factors besides the direct impact on wages. As discussed in this chapter, employer responses in terms of the training they provide, or whether or not they decide to employ workers from a different age group, will significantly affect the impact of the minimum wage. Overall such effects have been neutral. But the impact of the minimum wage is also affected by the Government's measures to encourage participation in the labour market and to make work pay. In the next chapter we consider the impact of the minimum wage on incomes. Previous Page... | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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