The National Minimum Wage represents a minimum amount, usually per hour, that most workers are entitled to receive for their labour. The introduction of the minimum wage has the objective of improving income equality, especially for those with fewer skills.
The National Minimum Wage Act 1998 was introduced to the United Kingdom by the Labour Party, ensuring that almost all workers receive a certain remuneration for work performed (BIS, 2011) and is reviewed yearly by the Low Pay Commission (LPC). Not all UK workers are entitled to the minimum wage, with the self-employed and those of compulsory school age being exempt from the incentive. By definition, not all people in the country receive the minimum wage rate, however the employment law enforced by the Department of Business, Innovation, and Skills (BIS) aims to ensure that all employees over the age of 16 receive a minimum wage.
The UK Government proposes that the National Minimum Wage protects low-income workers from low rates of pay, and provides greater incentive to work (BIS, 2011). Additionally, the BIS (2011) claims that the minimum wage ensures that business competitiveness results from the quality of goods and services rather than low prices enabled by low pay. Estimates put the proportion of UK working age individuals receiving the minimum wage at between four and six percent (LPC, 2007).
The minimum wage has been proposed to improve the wage of the lowest earners of an economy, something that has been evident in those in the bottom half of the earnings distribution in the United States (diNardo et al., 1996; Lee, 1999). In the 1980s, the US minimum wage was fixed at a nominal level, therefore declining in relation to average earnings. This subsequently caused a dramatic rise in wage inequality for those workers in the bottom half of the wage distribution (Dickens & Manning, 2004). These observations demonstrate the effectiveness of a minimum wage on improving wage equality at bottom end of the spectrum.
HM Revenue and Customs (HMRC) enforce the adherence of businesses to the National Minimum Wage, and those employers found to be incompliant will face legal action. On a case-by-case basis, criminal proceedings may be enforced if employees commit any offences under the act. Such offenses include refusing to pay the minimum wage, failing to preserve or forging related records, and obstructing any investigation. Criminal proceedings may include a fine, and additionally the HMRC are able to seize property to obtain and enforce the minimum wage jurisdiction (BIS, 2011).
Despite the introduction of the minimum wage as an employment law in the UK, not all employees receive a minimum wage. The National Minimum Wage Compliance Strategy (BIS, 2010) identified over 23,000 workers that were not paid the minimum wage in 2008/2009. Employee’s tactics to avoid paying this include keeping two sets of books, using accountants to falsify records, and failing to produce detailed records in effort to avoid conviction by the HMRC (BIS, 2011).
Identification of these employees meant that it was possible to ensure payment in arrears for the neglect of the minimum wage. Whilst this is a positive outcome, and these neglected workers receive their entitled wages, ensuring employer compliance with the minimum wage is still a main governmental pursuit (LPC, 2012). The Low Pay Commission are continually identifying employers that are not paying their workers the minimum wage (937 cases in 2010/11). Additionally, data show that in April 2011, approximately 233,000 UK adults were paid less than the minimum wage (LPC, 2012).
Not all individuals receiving less than the prescribed minimum wage (currently ?6.08 p/h for over 21s, ?4.98 for 18-21 year olds [HMRC, 2012]) are doing so against the minimum wage employment law. Exceptions include workers who have accommodation provided by their employer, apprentices and interns. One group particularly vulnerable to not receiving the national minimum wage is migrant workers. Research has shown that migrant workers have filled gaps in the UK labour market, however have also put downward pressure on wages at the bottom of the distribution, which have been prevented from falling further by the national minimum wage. The existence of a minimum wage to prevent wages falling further has positive implications for native workers, meaning they do not fall subject to lower wage rates. It also however, means that wages are unable to fall to a rate at which supply meets demand potentially leading to an increase in unemployment for those in unskilled jobs. The implications of the minimum wage for unemployment are not constrained to the presence of migrant workers, and this will be discussed in more detail later on. As well as having an impact on the labour market, migrant workers have been shown to be examples of people in the country receiving less than the prescribed rate. Research by French and Mohrke (2006) found that some employers of migrant workers put various charges on their salaries, reducing wages below the minimum wage, and deducting accommodation fees that were in excess of the legal allowance. The exploitation of migrant workers was further highlighted by Moore and Watson (2009) who discovered that they were at risk from low wages, unclear payslips and unauthorised deductions from wages.
It is therefore clear that the introduction of a national minimum wage in the UK has not provided everyone in the country with a wage above the prescribed rate, however the Government measures and implemented compliance enforcing techniques are further insuring that those entitled are receiving the minimum wage.
There is considerable evidence to show a compression of the lower wage distribution and therefore improvement of wage inequality as a result of the introduction of a national minimum wage. Machin et al. (2003) investigated this effect in the care home industry, a low-wage heavy sector, finding that the minimum wage had a sizeable impact on wage dispersion. The inequality between those earning in the 10th percentile (the lowest paid workers) and the 50th percentile (mid pay-range) reduced from 21% to 9%. There was no change between wages in the 50th and 90th percentile (a 34% gap). This effect is replicated in the UK labour market, with Butcher, Dickens and Manning (2012) finding evidence that income inequality at the bottom of the wage distribution since the introduction of the minimum wage. These findings demonstrate a ‘greatness’ of the minimum wage in achieving the Government’s aim of protecting the lowest earners from low wages, and achieving a more equal wage distribution.
Despite evidence of the desired effects on wage equality, the ‘greatness’ of the national minimum wage is something that has received debate since its introduction, with both scepticism and support for its effect on the UK labour market and economy.
Economic theory would suggest that in certain economic conditions, such as a recession, a national minimum wage would inflict a negative impact on employment, with employers being unable to afford workers and these workers being unable to offer their services for a lower wage to escape unemployment. Additionally, there is some evidence to suggest that employers substitute their unskilled workers for increased use of technology (Bullock et al., 2001; Gilman, 2002) to maintain productivity.
Despite this, investigations into the rate of unemployment have shown few effects of a wage floor on jobs (Petongolo & Van Reenen, 2011). The LPC acknowledges the existence of a pay level that would ‘destroy’ large numbers of jobs and aims to ensure that the minimum wage does not rise to this level (Manning, 2012). The LPC does, however, highlight several issues that have arisen in the labour market as a result of the minimum wage, which may compensate for not cutting employment rates. These responses to increased labour costs include cutting overtime hours, decreasing annual leave entitlement and pensions, merging pay zones, and reducing working hours (LPC, 2011). Although keeping individuals employed, these compensatory measures may mean that workers are not actually receiving a gain from the introduction of a minimum wage. However, the LPC subsequently states that reduced hours have not affected weekly earnings.
Another viewpoint is that the minimum wage actually encourages people into the workforce by providing increased incentive to work. For the voluntarily unemployed, it becomes more beneficial for them to enter into work instead of receiving unemployment benefits. This may explain why any effect of the minimum wage on employment levels in low-earners has been negligible (Manning, 2012).
It is also important to consider the effects of having to pay a minimum wage on the employers. Some businesses have responded to the minimum wage by increasing their prices, or accepting a lower profit margin (LPC, 2011). This may have implications for demand for products, and lower profits will have implications for investment in technology, advancements and training, as well as business growth. Consequently, a slowing in business growth has implications for employment, living standards, and consumer confidence (Riley, 2006). Whilst employers may suffer with increased labour costs, the minimum wage has also been suggested to have an impact on the productivity of workers. Standard neo-classical models would suggest that when introducing a minimum wage, all workers producing an output (marginal product) below that of the wage rate would likely be dismissed, as the firm substitutes labour for capital. The productivity of the workforce would therefore rise, as the same level of output would be required from fewer labour inputs (Forth & O’Mahoney, 2003). If this scenario holds true, it is evident again that unemployment would likely increase. Alternatively, as suggested by efficiency wage theory (Rebitzer & Taylor, 1995), employees may increase their marginal product in response to increased motivation from higher wages. This may also occur as a result of further employer supervision of effort as employers seek to protect their increased investment. Additional hypotheses suggest that to avoid dismissal, workers seek to increase their skills and education and therefore the quality of their output (Cubitt & Heap, 1999). This has positive implication for employment, as employers will not need to dismiss any workers and therefore output would rise equally with labour costs (Forth & O’Mahoney, 2003).
Opposing theories claim that rather than providing incentive to gain skills and remain in employment, the guarantee that all workers receive above a minimum amount will lead to lack of labour force skill development. It has been proposed that this occurs because young unskilled workers are enticed out of education and training and into the job market (Neumark & Wascher, 2008) something that has been shown in other countries. The UK’s LPC are concerned that there not be an incentive for young people to leave training (Croucher & White, 2011) and additionally have observed that the decision of young adults to stay in full-time education has been unaffected by wage rates (De Coulon et al., 2010). Whilst the improvement of pay inequality at the bottom end of the wage distribution cannot be disputed, raising the pay of low skilled workers may lead to the demand for companies to ensure the maintenance of pay differentials as higher-up workers insist on pay rises. In a case study, (Denvir & Loukas, 2006) found that 56% of companies interviewed had changed their hourly pay rates for those earning above the minimum wage in order to maintain wage differentials. This puts further pressure on companies’ labour costs and pressure to maintain employment levels, prices and profits. Whilst the minimum wage is pulling the lower skilled workers out of poverty, it may seek to push the wages of those greater skilled and earning employees even higher, and thus furthering inequality at the between those earning in the middle and top percentiles. This is something noted by Manning (2011) who asserts that it is those earning in the middle part of the income distribution that are feeling the real squeeze in their incomes. Although the minimum wage serves to protect those at the lower end of the wage spectrum, those earning higher rates may also be pushed out of employment or forced to absorb the work of lower skilled workers as employers are forced to make redundancies.
The introduction of a national minimum wage means that all workers meeting the criteria, regardless of location within the country, are entitled to receive the minimum rate or above. This has implications for those living in more expensive regions of the UK, where the minimum wage has greater ‘bite’, reaching further up the wage distributions in certain geographic regions than others (Stewart, 2002). This therefore means that the effect of the minimum wage and way that it works will differ in each geographical area. Some theorists argue for a regional variation in minimum wages (Smith, 2006), founded on the argument that employment and company efficiency in certain regions may be adversely affected by a minimum wage rate that is above the region’s productivity levels (Dolton et al., 2008). For example, whilst a higher minimum wage may be applicable in a highly competitive and productive capital city, this wage rate may not be sustained in a rural community with lower costs of living. It must also be appreciated however, that productivity, unemployment and employment rates have varied across regions from well before the inception of the minimum wage. Investigation by Dolton et al. (2008) elucidates the impact of regional variation on minimum wage effects, showing that areas where the minimum wage has a larger bite experienced larger declines in the 50th percentile- 5th percentile wage ratios than elsewhere. They additionally found that these areas were more susceptible to higher rates of unemployment in the first few years of the minimum wage introduction, which then reversed with these areas experiencing lower rates of unemployment in the years to follow. Additionally, the discrepancy between the minimum wage bite between geographical regions does not just have implications for the labour market as a whole, it also affects individual workers differently. Whilst the wage has been introduced to reduce poverty, increase living standards and inequality amongst the low skilled workers, it seems ironic that this may be a case more greatly than for others dependent on where they live. Consider the case of a set of twin brothers, who both work as toilet attendants. On the minimum wage, twin A, who lives in Northumbria has a purchasing power 10% greater than twin B, who lives in greater London, meaning that twin B has to work an eleven days to be able to purchase the same goods as twin A (Office for National Statistics, 2010). Disparity such as this has been recognised by the UK government, reflected in the introduction of the London Living Wage, whereby London address holder employees of Greater London Authority member companies (such as the NHS) benefit from an increased wage rate.
Overall, the ‘greatness’ of the minimum wage can be seen in its assurance that no employees of working age will be subjected to low or unfair wage rates. The national minimum wage ensures that no members of the labour force need live in poverty, although the regional variations in such a statement have implications. The quality of life and fairness for individuals provided by the minimum wage is of great importance, and this is something that is emphasised by the UK government’s efforts to ensure compliance to the minimum wage jurisdiction. Despite benefit for many individuals, a national minimum wage presents many implications for countries’ labour markets and economies. The results of these implications can be controlled with an effective wage floor rate, and the issue of balance should be carefully considered and monitored by any regulatory body.
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