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Low Pay Commission Website
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Low Pay Commission
8th Floor
Oxford House
76 Oxford Street
London
W1D 1BS


General enquiries:
020 7467 7207
Press enquiries:
020 7467 7279
E-mail:
lpc@lowpay.gov.uk
 
 
 
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Chairman’s Foreword

The Commissioners

Executive Summary

Recommendations

List of Figures

List of Tables


1 Introduction

2 The Impact of the National Minimum Wage

3 The Effects of the National Minimum Wage on Specific Sectors and on Small Firms

4 Groups of Workers and Specific Enforcement Issues

5 Young People and Trainees


6 Compliance and Enforcement

7 Setting the Rates

Appendices
Appendix 1
Appendix 2
Appendix 3
Appendix 4
Appendix 5
Appendix 6
Appendix 7

Abbreviations

Bibliography

 
 
National Minimum Wage
Low Pay Commission Report 2005
APPENDIX 3


Low Pay Commission Survey of Employers

The Survey

1 For previous reports we have conducted surveys of employers in low paying sectors to provide information on how businesses have responded to and coped with the National Minimum Wage. For this report we have carried out a further survey of employers to examine the impact of the October 2003 upratings of the minimum wage and to complement the information we obtained from our research programme, written and oral evidence, and official statistics. We consider here the key findings of the survey, including the impact of the upratings on wage bills and differentials, benefits, productivity, prices and profits. In line with our last survey, we also asked additional questions of the social care and textiles sectors. The survey questionnaire can be found at the end of this Appendix.

2 As with our earlier surveys, we have targeted the sectors that were most likely to be affected by the minimum wage. Our analysis of the New Earnings Survey data indicated that hospitality, retail, social care, the manufacture of clothing, textiles and footwear, hairdressing, cleaning, security and leisure continue to be the main low-paying sectors. We adopted a similar approach to that taken for our fourth report (2003). In so doing, we aimed to maintain a level of consistency to enable comparison with the impact of the 2001 upratings. However, we developed the survey questionnaire to capitalise on the aspects from which we had previously obtained the most useful data.

3 We commissioned NOP World to undertake the administration of the survey on our behalf. A sample of firms in the low-paying sectors was selected from the Dunn and Bradstreet business database. NOP World distributed questionnaires to 32,306 employers, with an emphasis on small firms in the Summer of 2004. We are very grateful to the firms that completed and returned the questionnaires. We received 3130 replies - a response rate of 10 per cent. The response rate was 3 percentage points lower than the response rate achieved in our 2002 survey. However, the level of response has been sufficient to enable us to obtain very useful information from the survey.

4 Table A3.1 gives the response rates by sector and shows that the highest rate of response was from the social care and childcare sectors, as was the case in our 2002 survey.

Table A3.1 Responses to the Survey by Sector

5 The respondents to the survey are not a random sample of firms in the sectors. Respondents are more likely to be affected by the minimum wage than non-respondents.

6 Table A3.2 shows that respondent firms employed nearly a quarter of a million people. This is fewer than in the 2002 survey and reflects the lower response rate to this survey. Eighty per cent of responses came from firms with fewer than 50 employees, as shown in Table A3.3.

Table A3.2 Number of Employees by Sector in the Sample

Table A3.3 Size Distribution of Firms by Sector

Base: All firms that provided employee numbers.

Impact

7 Table A3.4 shows that half of the respondents to the survey stated that their business had been affected by the October 2003 upratings of the minimum wage. The highest proportion of respondents affected were in the cleaning, childcare, retail and hospitality sectors. The most significant impact was in the cleaning sector with nearly double the proportion of respondents saying they were affected by the 2003 upratings compared with the 2001 upratings. The proportion of firms affected in the hospitality and retail sectors increased by 7 and 15 percentage points respectively.

8 According to the results of the survey, the impact of the 2003 upratings was greater on large firms with 63 per cent being affected, a 16 percentage points increase when compared with those affected by the 2001 upratings. Medium-sized and small firms also said that they had observed a greater impact from the 2003 upratings, although not so marked. Sixty-one per cent of medium-sized firms and 46 per cent of small firms said they had been affected, an increase of 8 and 2 percentage points respectively on the previous survey. Firms in the North of England were proportionately most affected at 66 per cent, with firms in Greater London being least affected at 31 per cent.

Table A3.4 Percentage of Firms Affected by the October 2003 Increases in the National Minimum Wage in Any Way

Base: All firms.

9 It is important to note that the responses to our questionnaire are likely to overstate the impact that the National Minimum Wage has had on businesses for two main reasons. First, the survey specifically targeted those low-paying sectors that were most likely to have been affected. Second, even within these sectors, those who responded were more likely to have been significantly affected than non-respondents. We tested the hypothesis of an upward bias in our fourth report (2003) through a telephone survey of a random sample of non-respondents. This confirmed that the proportion of those affected was considerably lower than in the postal survey. Those in the telephone survey had also experienced a smaller impact on their wage bill. Given these factors, the survey responses should not be taken as indicative of the overall impact on business, even in low-paying sectors. The survey does, however, provide valuable information about how those affected by the increases in the minimum wage have coped with it and enables comparison between sectors and size of business.

Total Wage Bill

10 Table A3.5 shows that nearly three-quarters of respondents affected by the 2003 upratings had reported an increase in their wage bill of 5 per cent or more, with just over half reporting a wage bill increase of between 5 to 10 per cent. Approximately a quarter of respondents from the social care and childcare sectors reported a 10 per cent or greater increase on their pay bill. We found that significantly fewer large firms saw their wage bills rise by 10 per cent or more (6 per cent) compared with small firms (21 per cent) and medium-sized firms (17 per cent).

Table A3.5 Impact on Total Pay Bill for Those Affected by the October 2003 Increases in the National Minimum Wage

Base: All firms affected by the October 2003 increases in the National Minimum Wage in any way. (Fifty three per cent of firms did not answer this question.)

Differentials

11 Table A3.6 shows that almost half of those affected by the October 2003 upratings in the minimum wage had increased their lowest rate of pay in order to maintain pay differentials above the minimum wage rate. The childcare and social care sectors were again most affected. Across the sectors 35 per cent of small firms, 38 per cent of medium-size firms and 48 per cent of large firms said they had increased pay rates to maintain differentials for experienced or higher-grade staff.

Table A3.6 Impact on Pay Rates for Those Affected by the October 2003 Increases in the National Minimum Wage

Base: All firms affected by the October 2003 increases in the National Minimum Wage in any way.

12 Table A3.7 shows the distribution of the highest hourly rate increased as a result of the 2003 upratings. The median for the highest hourly rate which firms reported increasing was around £5.25 per hour. For about a third of respondents affected by the increase in the minimum wage, the highest rate they had to increase was below £5.00 per hour and for less than a quarter the highest rate increased exceeded £6.49 per hour. The data suggest that the effect on the higher rates of pay was most significant in the childcare, cleaning and social care sectors, and in businesses employing more than 50 workers.

Table A3.7 Distribution of Highest Hourly Rate Increased

Base: All firms affected by the October 2003 increases in the National Minimum Wage in any way.

Benefits

13 We asked firms affected by the 2003 increases in the minimum wage whether it had led to any benefits to their business. The results are given in Table A3.8. The greatest level of benefit noted was in staff motivation with an average of 15 per cent of firms claiming to have noticed an improvement in motivation amongst their workforces. A quarter of firms in the security sector reported an increase in motivation. Firms in the security and cleaning sectors were most likely to have experienced lower staff turnover and faster filling of vacancies. Only a small percentage of firms across the low-paying sectors said they had obtained any significant benefit from the 2003 increases, although 7 per cent of hairdressing firms reported experiencing a significant decrease in staff turnover.

14 A higher percentage of respondents from Northern Ireland (26 per cent) reported obtaining benefit from the 2003 minimum wage increases, compared with the English regions, Wales and Scotland, where approximately a tenth of firms said there had been benefits.

Table A3.8 Benefits to Business from the October 2003 Increases in the National Minimum Wage

Base: All firms affected by the October 2003 increases in the National Minimum Wage in any way.

Staffing

15 Around half of the firms affected by the October 2003 increases in the minimum wage reported making a wide range of adjustments to staffing in response. Table A3.9 shows that the most significant response by businesses to the 2003 increases in the minimum wage across all the sectors was to reduce overall staffing levels, reported by 37 per cent of firms. The results show that the retail, textiles, hospitality and hairdressing sectors have been most affected in terms of staffing levels. The changes made by firms showed little variation irrespective of their location.

16 We also analysed the interaction of increased wage bill costs with the impact on staffing. This revealed that firms reporting increases in the wage bill of 5 per cent or more were most likely to have made a range of changes to their business as a result. In particular they were more likely to have decreased staffing levels and hours worked. Forty-two per cent of those with an increase in their pay bill of 5 per cent or more reported a decrease in overall staffing levels, compared with 27 per cent of those whose wage bill increased by less than 5 per cent. This is consistent with the response by firms following the 2001 minimum wage upratings.

Table A3.9 Changes Made by Firms as a Result of the October 2003 Increases in the National Minimum Wage

Base: All firms affected by the October 2003 increases in the National Minimum Wage in any way.

Note: The remaining respondents noted 'no change'. A small percentage of firms did not answer all questions in this section and these have also been assumed to indicate 'no change'.

Productivity, Prices and Profits

17 Table A3.10 shows the range of adjustments made by firms following the October 2003 upratings. About eight out of ten firms affected experienced a decrease in profits, by far the most common change reported by firms. An increase in prices was reported by nearly two-thirds of those affected and was the key adjustment made by firms in the childcare and cleaning sectors. Other measures taken by firms differed by sector. For example, 22 per cent of hairdressing firms reported introducing new products and services, whereas in the cleaning sector only 2 per cent said they had done so. Eighteen per cent of firms in the childcare sector said that they had increased their use of unskilled or unqualified labour due to the 2003 increases in the minimum wage, compared with an average of 11 per cent across the other sectors. Firms in the hospitality sector were most likely to take measures to control non-labour costs. Over a quarter of respondents from the security sector said they had increased the quality of their goods and services, closely following by just over a fifth of respondents from the hairdressing sector.

Table A3.10 Changes in Firms as a Result of the October 2003 Increases in the National Minimum Wage

Base: All firms affected by the October 2003 increases in the National Minimum Wage in any way.

Note: The remaining respondents noted 'no change'. A small percentage of firms did not answer all questions in this section and these have also been assumed to indicate 'no change'.

18 As in our 2002 survey, small firms were generally more likely than larger firms to report 'no change' when asked about the impact of the minimum wage on a range of factors in their business. Micro firms were least likely to make changes to their business as a result of the 2003 upratings. Eighty-two per cent of firms with between 6 and 200 employees reported a decrease in profits, compared with 70 per cent of firms with 201+ employees and 75 per cent of firms with 1 to 5 employees. Firms with more than 200 employees were most likely to make use of new technology and processes and to take measures to control labour and non-labour costs. There was little difference in the responses by firms based on their location. Firms in Greater London were, however, less likely to have experienced a decrease in profits or an increase in prices as a result of the 2003 upratings.

19 In the survey we asked additional questions of firms in the textiles sector. We knew from previous surveys and consultation that this sector made particular use of incentive pay schemes, so we asked about the impact of the increases in the minimum wage on incentive schemes and productivity. A quarter of all textiles firms reported that they had an incentive pay system; this rose to half amongst textile firms with 50 or more employees. Fifty-two per cent of those with incentive schemes said they had been affected by the 2003 increases in the minimum wage compared with 26 per cent of those without such a scheme. We asked whether firms had experienced any of the effects outlined in Table A3.11. Thirty-one per cent of firms in the sector reported increased costs as a result of the 2003 upratings. However, around 80 per cent of respondents reported no impact for the other four possible effects.

Table A3.11 Impact of the National Minimum Wage on Incentive Systems in the Textiles Sector

Base: All firms in the textiles sector with an incentive scheme.

20 In previous reports we have commented on the reliance of the social care sector on local authority fees. In this survey, as in the one undertaken in 2002, we sought information on the extent to which businesses in this sector had been able to renegotiate the conditions of public service contracts following the increases in the minimum wage. Ninety per cent of those affected by the October 2003 increases in the minimum wage in the social care sector had public sector contracts. A third tried to renegotiate their contracts to take account of increased minimum wage costs, but only 11 per cent of those that had done so had been successful, with a further 29 per cent being able to recoup part of the increase.

Pay Structures

21 Table A3.12 shows that 20 per cent of firms responding to the survey said they use age-related pay structures, although they are more common in the hospitality and retail sectors, at 31 and 30 per cent respectively, and in the hairdressing sector at 28 per cent. Security and cleaning firms were least likely to have such structures. Age-related pay structures are more likely to be used by medium-sized and large firms. Firms with age-related pay structures were asked about their minimum hourly rates but we do not know how many of their employees were paid these rates. Figure A3.1 gives the distribution of minimum pay rates for those firms in the sample with age-related pay structures and employees in the specific age group. It shows that average minimum hourly rates rise steadily with age. Around half of the firms using age-related pay paid at least the then adult minimum hourly wage rate of £4.50 for 18 year olds. This increases considerably for 21 year olds with three quarters of firms surveyed paying at least the adult minimum wage to workers aged 21. Nearly half of firms with age-related pay structures had minimum hourly pay rates below £3.80 for those aged under 18.

Table A3.12 Firms with Age-related Pay Structures

Base: All firms responding to the survey.

22 We asked all respondents to the survey to state the age from which they pay their full adult hourly rate of pay. Eighty per cent of all respondents provided this information. Table A3.13 shows the age groups at which respondents said they pay their lowest adult wage rate. Of these, over half pay their adult rate to employees aged 18 or under, with 78 per cent paying their adult rate to those aged 21 and under. The age at which the adult rate of pay applied differed considerably by sector. The cleaning and social care sectors were most likely to pay their adult rate to employees aged 18 or under (79 and 69 per cent respectively), whereas only 26 per cent of hairdressing firms reported doing so.

Table A3.13 The Starting Age at Which Firms Pay Employees the Adult Rate of the Minimum Wage

Figure A3.1 Distribution of Minimum Hourly Pay Rates by Age

Figure A1 - app2

Note: NMW label shows the adult NMW rate. YDR label shows the youth Development Rate. ADR label shows the older workers' Development Rate.
In each case, the rate was that in place at the time the survey was conducted.

23 There were two principle reasons given by firms for using age-related pay structures (see Figure A3.2). The most common reason, cited by 71 per cent of firms, was to take account of employees' level of experience. The National Minimum Wage was the second most common reason, cited by 55 per cent of firms.

Figure A3.2 Reasons for Age-related Pay

Figure A2- App2

24 For firms that do not have age-related pay structures, the two most significant factors accounting for differences in workers' pay are responsibilities, particularly in the cleaning (88 per cent), security (86 per cent) and leisure (85 per cent) sectors, and experience, particularly in hairdressing (84 per cent). Qualifications and skills came closely behind.

Development Rate

25 Only 4 per cent of respondents said they used the Development Rate for employees aged 22 or over, the same level as in our last survey. Table A3.14 shows that 11 per cent of employers in the hairdressing sector said they used the Development Rate, followed by employers in the childcare sector at 6 per cent.

Table A3.14 Percentage of Firms Using the Development Rate for Employees Aged 22 and Over

Base: All firms.

26 We asked firms that do not currently use the Development Rate, whether they were more likely to use it when the adult minimum wage increases to £4.85 in October 2004. Twenty-two per cent of respondents stated that they would, which is a significant increase on those currently using the Development Rate (4 per cent). Respondents most likely to use the Development Rate due to the October 2004 increases were in the hairdressing (36 per cent) and childcare (33 per cent) sectors. Some caution should, however, be taken in interpreting these results as the wording in this questionnaire may have been interpreted to include the youth Development Rate.

Substitution of Workers

27 We asked firms affected by the October 2003 increases in the minimum wage whether it made them more or less likely to employ workers in different age groups. Overall the increase has had little impact on the employment of younger workers. Table A3.15 shows that 85 per cent of respondents said it had not made a difference to their employment of 16 to 21 year olds and 88 per cent said it had not made a difference to their employment of workers aged 22 or over. More firms overall reported that they would not substitute different age groups of workers as a result of the 2003 upratings, compared with the 2001 minimum wage upratings (an increase of 13 percentage points). Eight per cent of firms with an increase in their wage bill of 5 per cent or more reported that they were less likely to employ staff aged 22 or over, compared with 4 per cent of those who experienced a smaller pay bill impact.

Table A3.15 Have the 2003 Increases in the National Minimum Wage Made You More or Less Likely to Employ Workers in Different Age Groups?

Base: All firms.

28 We also asked respondents whether the introduction of a National Minimum Wage of £3.00 for 16 and 17 year olds in October 2004 would make them more or less likely to employ workers in different age groups. The results are given in Table A3.16. The most notable outcome from responses given by firms was from the hairdressing sector. Thirty-eight per cent of hairdressing firms said that they would be less likely to employ 16 and 17 year olds, 22 per cent less likely to employ 18 to 21 year olds, and 11 per cent less likely to employ 22 year olds or over (firms may have been unaware of the exemption for apprentices aged below 19).

Table A3.16 Will the Introduction of a National Minimum Wage of £3.00 for 16 and 17 Year Olds in October 2004 Make You More or Less Likely to Employ Workers in Different Age Groups?

Base: All firms responding to the survey.

Apprentices

29 Overall, 7 per cent of respondents employed apprentices under a Government apprenticeship scheme and 4 per cent under a contract of apprenticeship, as shown at Table A3.17. Hairdressing and childcare were by far the most significant sectors employing apprentices.

Table A3.17 Firms Employing Apprentices

Base: All firms responding to the survey.

30 Table A3.18 shows that 77 per cent of all apprentices were aged 19 or under. Twelve per cent of firms employed four or more apprentices, while 43 per cent employed only one. We asked firms with apprentices to give their lowest hourly rate of pay. The average hourly rate for first year apprentices was £3.40, rising to £3.74 in year two and £4.43 in year three. The lowest rates of pay for apprentices were most likely to be found in the hairdressing sector.

Table A3.18 Percentage of Apprentices by Age Group

Base: All firms employing apprentices.

Conclusion

31 Our survey has provided very useful information about the impact of the 2003 upratings on those sectors that are most affected by the minimum wage. The results complemented the view of the minimum wage we had obtained from our other research projects, written consultation, visits and economic analysis.

32 Half of all respondents to the survey said that their business had been affected by the October 2003 increases in the minimum wage. Three-quarters of firms affected (just over a third of all respondents) reported that their wage bill had increased by at least 5 per cent. The results suggest that the October 2003 increases have led to some compression of pay differentials, a finding which is consistent with our other sources of evidence.

33 Firms have taken a range of actions to cope with the impact of the minimum wage. Reducing staffing levels and increasing prices were the main responses, as we have seen in previous years, and some firms took more innovative measures, such as introducing new technology or products and services. However, some firms, especially in the social care sector, have found it more difficult to recoup increased costs.

34 The survey highlighted that there is still limited use of age-related pay structures, in particular beyond the age of 21. Twenty per cent of firms in the sample used age-related pay structures, which is in line with the results of the survey we carried out in 2002. Seventy-eight per cent of all responding firms paid their adult rate from age 21 or younger.

NATIONAL MINIMUM WAGE SURVEY
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