“Time has come to reform the minimum wage” says policy’s founder

The man who implemented the national minimum wage in the UK warned today that it is no longer strong enough to tackle the country’s low pay problems. The policy will need to be reformed if it is to repeat the successes of its first 15 years.

Professor Sir George Bain, the founding chair of the Low Pay Commission which recommends the rate of the minimum wage, is heading up a review of the policy’s future at independent think tank the Resolution Foundation. Professor Bain argues that the minimum wage has been a clear success in the first 15 years of its life but that the policy now needs strengthening to keep it effective and relevant for the next 15 years.

While the minimum wage has been highly successful at lifting most people out of extreme low pay, it has not had the upward ‘ripple effect’ that many expected. As a result, many workers earn just above the minimum wage but still too little to get by. In some sectors, the minimum wage has become the going rate.

Around 1.2 million workers are paid the minimum wage (or within 5 pence of it). Above that level however, a further 1.4 million workers earn no more than 50 pence above the legal hourly minimum (which is now £6.31 an hour, but was £6.08 an hour in April 2012 when these numbers were compiled). In total, 5 million workers remain low-paid. The official definition of low pay is earning below two-thirds of the typical hourly wage – which currently means someone earning less than £7.71 an hour is low paid.

An interim report from the Resolution Foundation, released today, notes that the current settlement has had many strengths but that it also falls short in important respects. The report sets out a range of options for reforming the minimum wage and giving the Low Pay Commission, which supports it, new impetus:

• Broadening the government’s work on low pay beyond the minimum wage by setting an explicit ambition to reduce the share of workers who are low paid. The Low Pay Commission could broaden its remit to monitor progress in the manner of the OBR, also giving the government expert advice on the drivers of low pay and policy responses. The review is considering how best to measure such a target, whether through the official OECD definition of low pay or an absolute measure of Living Standards like the Living Wage
• Set the ambition for the level of the minimum wage over a medium-term horizon . This would reduce uncertainty by giving businesses more time to adapt and allow government to help them, for example by adjusting tax or skills policy to allow for a higher NMW over time. The report considers three ways to set a longer-term horizon:

– Adopt a ‘forward guidance’ approach (like the Bank of England does for interest rates) which could include setting the minimum wage on a path that shadows growth in median earnings but exceeds that rate in periods of sustained GDP growth or when unemployment is low or falling;

– The government to set a clear intention for the medium-term value of the minimum wage with the LPC continuing to advise on progress towards this target. This could emulate the rolling five year target used to drive progress on fiscal policy through the OBR. The LPC would take a view on how much progress towards this target was possible each year as well as pointing to pinch points that are holding them back from recommending a higher NMW (for example, employer taxes on small businesses or the funding of social care);

– Raise the minimum wage over a five year period, asking the LPC to monitor the effects of the increase. This more radical option would set the NMW politically, turning the LPC into a monitoring body, and is therefore not favoured by the review.

• Given the LPC additional tools to complement the NMW, creating new pressure points on employers to go beyond the NMW when they can afford to. The review is considering whether the LPC could be asked to publish references rates for the wage floor that different sectors of the UK economy could afford to pay. These would be non-mandatory but would encourage employers to go beyond their legal obligations where possible. In the same way, a guideline minimum rate could be published for London to encourage employers in the capital to pay more

The paper gives first sight of the options being considered by Professor Bain’s review, and explores the pros and cons of each approach. The review’s final recommendations will be published in the spring.

Professor Sir George Bain, founding Chair of the Low Pay Commission which recommends the rate of the minimum wage, and chair of the Resolution Foundation review, said:

“The minimum wage has been a clear success but the world has changed in the fifteen years since it was introduced. We now know the policy has not caused unemployment, and there is broad political support. But with more than one in five workers in Britain suffering from low pay, it’s time to talk about how we strengthen the minimum wage for the years ahead.

“Reform of the minimum wage will be hard to get right—it would be easy to damage a policy that works well. But our discussions suggest there are ways to take a more assertive and ambitious approach while still keeping the flexibility of the current system.”

Ends

For more information contact:

Warwick Smith (head of communications) 020 3372 2959 or 07443 042722 warwick.smith@resolutionfoundation.org

Natalie Cox (communications officer) 020 3372 2955 or 07983 550337 natalie.cox@resolutionfoundation.org

Notes

1. The Resolution Foundation is hosting a review of the future of the National Minimum Wage under the chairmanship of Professor Sir George Bain. Professor Bain was the founding chair of the Low Pay Commission, which recommends the rate of the National Minimum Wage.

2. The Resolution Foundation is an independent research and policy organisation that works to improve the lives of people on low to middle incomes.