Regulatory Impact Assessment

Increase In National Minimum Wage Development Rate In October 2001

Introduction

This assessment estimates the costs and benefits of the recommendation contained in the Low Pay Commission's third report (volume II), which was submitted to the Government on Monday 11 June. The recommendation is to increase the youth rate of the national minimum wage from £3.20 an hour to £3.50 an hour on 1 October 2001.

The LPC was appointed in 1997 to make recommendations on the appropriate rates for the national minimum wage, to monitor its implementation and to evaluate its impact. It was given a fresh remit in 2000 to make recommendations on further increases in the adult and development rates, to come into force in October 2001.

Purpose of the Proposal

The national minimum wage development rate was introduced at £3.00 an hour for adults in April 1999, and increased to £3.20 an hour in June 2000. Clearly without further increases, its real value will fall year on year. The proposal is to increase the rate to £3.50 an hour, in line with the recommendation of the independent LPC.

LPC Assessment

The LPC report gives a thorough assessment of the likely impact of the increase on business and the economy. It looks in particular at the impact on sectors where low pay and employment of youth workers is particularly prevalent, where the impact of the minimum wage is likely to be greatest.

The LPC says, (paragraph 2.96, volume II of the 3rd report): "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".

This Regulatory Impact Assessment does not attempt to duplicate the LPC's work but its draws on its findings.

Costs and benefits

A rise in the National Minimum Development Wage to £3.50 in October 2001 is a rise of 16.7 per cent over the two and a half years since the minimum wage was introduced in April 1999. Whilst its impact on the overall wage bill of employers will be small, the rise will be of significant benefit to young workers on low incomes, especially those who are paid at the prevailing minimum wage rate.

In estimating the costs and benefits, it is assumed that in the absence of any increase in the minimum wage adult rate, workers at the bottom of the wage distribution receive pay rises linked to Retail Price Inflation (1). Based on data from National Statistics' April 2000 New Earnings Survey, it is estimated that around 140,000 youth workers will benefit directly from the increase in the National Minimum Wage to £3.50 in October 2001.

Assuming that 140,000 youth workers benefit directly from the increase in the minimum wage from £3.20 to £3.50 and that there is no restoration of differentials, the estimated direct cost to employers would be around £35 million in the first year. Similarly, the estimated benefit to youth workers on low pay would be around £35 million, equivalent to an average pay rise per worker of around £250 per year, before tax. A full-time worker, working 40 hours a week and receiving the current statutory development rate of £3.20 would receive a gross pay rise of over £620 per year.

The increase in wage costs as a direct result of the minimum wage would represent an increase of 0.01 per cent in the economy's total wage bill .

In coming to these estimates, we have applied our own methodology and assumptions to the National Statistics data. These estimates are sufficiently consistent with those of the Low Pay Commission to give the Government full confidence in the findings of its report on the impact.

Impact on small firms

The LPC looked at the impact of an increase to £3.50 on small firms in their report. They found 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," (page 43, Volume II). The report also shows (figure 2.22, page 44, Volume II) that the biggest (relative) impact by business size will be on firms with up to 9 employees, but even in this group the absolute impact of the uprating is expected to be small.

Appendix 2 of the report looks in detail at the impact of the introduction of the minimum wage on a large number of groups and sectors. For example, it compares the impact on large and small firms in the retail sector and concludes that "the National Minimum Wage has been generally manageable", but "small stores are more likely to have been affected than larger stores," (page 138 of the report).

Monitoring and Review

The Government has confirmed that the LPC will continue in its role of monitoring the impact of the minimum wage.

Declaration

I have read the Regulatory Impact Assessment and I am satisfied that the balance between cost and benefit is the right one in the circumstances.

Signed by the responsible Minister:

Date:

Contact point:

David Wagstaff
Employment Relations
Department of Trade and Industry
020 7215 0252

Footnotes

1. To illustrate the impact of other assumptions, if earnings of low paid young people increased in line with average earnings rather than inflation, the number of beneficiaries would be slightly lower (130,000), as would the increase in the wage bill.