Memorandum by Professor William Brown,
Cambridge University
INTRODUCTION
Since about 1980 income inequality in Britain
has increased rapidly. Part of the reason is that the relative
position of the lowest paid workers deteriorated substantially.
In 1999 a National Minimum Wage was introduced, which reversed
this trend, improving the relative position of the lower paid
substantially. Quite independently of this, over the past ten
years, the British economy has experienced an unprecedented increase
in net immigration. The influx of relatively unskilled labour
threatened to worsen further the relative position of the low
paid. This note discusses whether the presence of a National Minimum
Wage (NMW) has moderated this effect.
THE INTRODUCTION
OF THE
NMW
Until 1999, Britain had no comprehensive legally
enforced minimum wage. The main method of wage fixing for most
of the 20th century had been collective bargaining. At their most
extensive, in about 1970, collective agreements covered about
80% of all employees. In addition, for something over 10% of employees,
there were legally enforced minimum wages, fixed by institutions
called "wages councils", for specific industries, such
as retail, hotels, and agriculture. The decline of trade unions
and their influence in the private sector at the end of the 20th
century brought a major change. By 2000 the coverage of collective
bargaining had fallen to about 30% of employees. In addition,
in 1993 the government abolished wages councils for all industries
except agriculture. The effect of these changes, combined with
increased international competition and the automation of many
unskilled jobs, contributed to a relative decline in the pay of
less skilled workers, a decline that had started in about 1980.
Figure 1
THE PERCENTAGE INCREASE IN PAY 1992-97 OF
DIFFERENT PERCENTILES OF THE UK INCOME DISTRIBUTION, EXPRESSED
AS DEVIATIONS FROM PERCENTAGE INCREASE OF THE MEDIAN
Figure 1 portrays how income was becoming increasingly
unequal during the 1990s. It shows, for each percentile in the
income distribution, the extent to which wage increases between
1992 and 1997 differed from the median employee's wage increase.
It will be evident that the lowest paid workers experienced deteriorating
relative wages. There is every reason to suppose that this deterioration
would have continued, had there not been the major intervention
of the introduction of the NMW.
The NMW came into effect in 1999. The NMW's
initial level, and all subsequent increases, have been fixed on
the advice of an independent Low Pay Commission (LPC), which has
equal numbers of trade union and employers representatives. As
Figure 2 shows, initially the annual increases were cautious,
but from 2003 onwards, the NMW has been raised faster than average
earnings. As a result, its impact since then has been increasing.
The NMW was increased from an initial 47.6% of median earnings
in 1999 to 52.1% of median earnings in 2006. In terms of the number
of employees directly benefiting, this rose from 1.2 million in
1999 to 2.1 million in 2006—that is, to directly benefit
nearly one employee in ten.
Figure 2
INCREASES IN NATIONAL MINIMUM WAGE, AVERAGE
EARNINGS AND PRICES
|
| Date of NMW increase | NMW adult rate per
hour (workers aged
22+)
| Increase in NMW
since previous
NMW setting
| Increase in average
earnings index since
previous setting
| Increase in retail
price index since
previous setting
|
| £
| % | %
| % |
|
| 1 April 1999 | 3.60
| - | -
| - |
| 1 October 2000 | 3.70
| 2.8 | 3.1
| 2.7 |
| 1 October 2001 | 4.10
| 10.8 | 4.3
| 2.3 |
| 1 October 2002 | 4.20
| 2.4 | 3.7
| 2.3 |
| 1 October 2003 | 4.50
| 7.1 | 3.6
| 2.7 |
| 1 October 2004 | 4.85
| 7.8 | 4.2
| 2.1 |
| 1 October 2005 | 5.05
| 4.1 | 3.7
| 2.3 |
| 1 October 2006 | 5.35
| 5.9 | 4.0
| 3.2 |
|
The impact of the NMW on incomes was immediate and substantial.
Figure 3 has the same form of analysis as Figure 1, showing the
extent to which the income increase for a given period, for each
percentile in the national income distribution, differs from the
income increase experienced by the median employee. To help comparison,
Figure 3 repeats the portrayal for 1992-1997, before the NMW,
that was shown in Figure 1. It also portrays the increases after
the NMW was introduced, for the initial period 1998-2003, and
also for the longer periods 1998-2004 and 1998-2006, during the
latter part of which the NMW was being increased faster than average
earnings. It will be evident that the impact on the bottom five
per cent or so of income earners was dramatic, with the previous
five years' relative decline in pay being sharply reversed into
substantial relative increases of from 5 to over 20%. Indeed,
the whole bottom quartile of the income distribution swung around
from relative decline to relative improvement. It will also be
evident that this relative improvement increased further in the
three years up to 2006. At the top of the income distribution,
inequality continued to increase as it had done in the 1990s.
But at the bottom end, there was a substantial and sustained improvement
in relative pay, a reduction in inequality, which can be directly
attributed to the introduction of the NMW.
Figure 3
THE PERCENTAGE INCREASE IN HOURLY EARNINGS 1992-2006 OF
DIFFERENT PERCENTILES OF THE UK ADULT HOURLY EARNINGS DISTRIBUTION,
EXPRESSED AS DEVIATIONS FROM PERCENTAGE INCREASE OF THE MEDIAN
Source: ONS, New Earnings Survey 1992-1997 and 1998-2003.
Annual Survey of Hours and Earnings (ASHE) without supplementary
information, 1998 and 2004, and ASHE with supplementary information,
2006. Gross hourly earnings excluding overtime. There is a change
of definition in ASHE in 2004 so comparisons using identical data
definitions between 1998 and 2006 are not possible. We make such
a comparison for illustrative purposes only. Consistent NES data
is available from 1992 to 2003 and is also shown.
EMPLOYMENT EFFECTS
In the years leading up to the introduction of the NMW, political
argument about it concentrated upon its possible effects upon
employment. Some commentators feared that the working of the labour
market would mean that a statutory minimum wage would price many
workers out of jobs and increase unemployment. As a result, the
LPC has devoted considerable care to monitoring the employment
impact of the NMW. It has commissioned surveys and a substantial
number of technically sophisticated research analyses in order
to investigate employment effects. These are described and summarised
in successive LPC reports[17].
Figure 4 gives data on aggregate employment and unemployment
from 1992 until 2007. It will be evident that the period since
the NMW was introduced in 1999 was one of steadily increasing
employment, and of declining, and then relatively stable, unemployment.
The current level of unemployment is about 5.5%.
Figure 4
EMPLOYMENT AND UNEMPLOYMENT IN THE UK, 1992-2007
Source: ONS, LFS, all aged 16 and over employed (ONS
code MGRZ) and unemployed (ONS code MGSC), monthly, seasonally
adjusted, thousands, UK, 1992-2007.
The research conducted for the LPC suggests that the NMW
has tended to squeeze pay structures at the lower end, but that
employers have adapted to this without significant productivity
loss. Indeed, a significant employer response has been to increase
the productivity of affected workers by improving capital equipment,
training and work discipline. There has been a slight reduction
in hours worked by those affected. There has been a slight impact
on profits but none on company closures. There has been a slight
upward impact on consumer prices for some services. One of the
most effective statistical tests used "difference in difference"
techniques, which compare the experience of workers affected by
the minimum wage with that of workers unaffected but with otherwise
similar characteristics. These have failed to detect any significant
adverse employment effects arising from the introduction of the
NMW, or from subsequent increases in it.
Figure 5 shows what has happened to employment in the major
sectors affected by the NMW since its introduction in 1999. It
analyses this in terms of the share of total employment in the
economy, in order to eliminate distortions arising from the fact
that the economy was growing as a whole over the period. It will
be evident that for the most important sectors, their share of
total jobs was expanding. The NMW may or may not have slowed the
growth of these sectors—it is always difficult to assess
what might have happened if circumstances had been different—but
certainly the NMW did not prevent their growth. The sectors where
employment share was falling—agriculture, textiles, clothing
and footwear—have been subject to decline over many decades
as a result of long-term trends in technology and trade. The NMW
cannot have been a significant contributor to this.
Figure 5
CHANGE IN JOB SHARE IN THE MAIN SECTORS AFFECTED BY THE
NMW
|
| Sector | Employee jobs
March 1999
| Employee jobs
March 2006
| Absolute change in
number of jobs
1999-2006
| % share
|
| thousands
| thousands | thousands
| 1999 | 2006
|
|
| All | 24,206
| 25,918 | 1,712
| 100 | 100
|
| All low paying sectors below | 6,311
| 6,698 | 387
| 26.1 | 25.9
|
| Retail | 2,525
| 2,818 | 293
| 10.4 | 10.9
|
| Hospitality | 1,557
| 1,743 | 186
| 6.4 | 6.7
|
| Social care | 073
| 1,101 | 128
| 4.0 | 4.2
|
| Cleaning | 435
| 434 | -1
| 1.7 | 1.7
|
| Agriculture | 271
| 204 | -67
| 1.1 | 0.8
|
| Security | 128
| 158 | 30
| 0.5 | 0.6
|
| Textile, clothing, footwear | 306
| 127 | -179
| 1.3 | 0.5
|
| Hairdressing | 98
| 112 | 14
| 0.4 | 0.4
|
|
Let us summarise the argument thus far. The introduction
of the NMW, at a time when the relative pay of the lowest earners
in the UK economy was deteriorating, has had a substantial impact.
It has reversed the decline. But, contrary to simple economic
predictions, this has not so far had any significant discernable
adverse effects on employment. The largest affected sectors have
continued to see employment grow as a share of the British economy.
We can now consider the implications for the effects of substantial
immigration.
THE IMPACT
OF IMMIGRATION
Until the 1990s, the UK generally lost more people through
emigration than it gained through immigration. Then, as Figure
6 shows, immigration started to rise substantially faster than
emigration. These official figures under-estimate the net immigration
because there is a greater tendency for individuals to conceal
their entry than their exit from the UK. It is, for example, officially
estimated that there are approximately 500,000 "illegal"
or undocumented immigrants working in the UK at present. The proportion
of the UK workforce born outside the UK rose from 6 per cent in
1995 to 11.5 per cent in 2005. The increase in net immigration
has been particularly substantial since the accession of the eight
new EU member states since May 2004. Britain placed no significant
restrictions on their admission. In the initial two years to April
2006, nearly 400,000 workers from these states were registered—which
understates the numbers since self-employed do not have to register.
In the year to April 2006, National Insurance numbers, necessary
for legal registration for work, were issued to 662,000 overseas
nationals, an unknown proportion of whom would have been seeking
temporary employment, planning to return home soon.
Figure 6
NET IMMIGRATION TO THE UK, 1991-2005
Although the precise statistics on migration are still very
unclear, what is undisputed is that, since the late 1990s, and
especially since 2004, Britain has experienced a higher rate of
immigration, and of net immigration, than at any time in its history.
These migrants tend to be relatively young (80 per cent are between
16 and 34), and evenly balanced between men and women. Compared
to the indigenous population, they tend to be disproportionately
both highly and lowly qualified in terms of skills and education.
That is, they contain a higher proportion of graduates, but also
a higher proportion of people with relatively low skills than
the native population. They tend initially to move into less skilled
jobs than their education and training would suggest, but as they
settle in and learn English, they tend to move up the job ladder
faster than the indigenous workforce. At first, however, migrants
tend to compete for jobs disproportionately with those indigenous
workers who are at the bottom of the income distribution.
The LPC commissioned research into the effects of recent
migration on pay in Britain[18].
This analysed the different experience of different regions over
time. It identified slight positive income effects for workers
higher up the income distribution. But, at the lower levels of
income, there was clear evidence that the increased competition
for relatively unskilled work that was arising from the high levels
of immigration was tending to depress wages. Immigration has tended
to increase numbers of non-immigrant workers at the low end of
the income distribution. It has "increased the spread of
the distribution below the median, but has done little to affect
the distribution above the median". The authors conclude:
"This suggests that the minimum wage performs an important
role to secure wages of workers who otherwise would lose out from
immigration".
Three additional points should be made in assessing the role
being played by the NMW in moderating the impact of immigration
on the pay of non-immigrants. First, many immigrants are more
vulnerable to exploitation than native workers. They often do
not speak English. Some are in Britain illegally and have been
smuggled in by criminal gangs who use violence and blackmail.
These gangs have been known to threaten immigrants' families back
home and exploit the indebtedness of those who have paid to be
smuggled in. Immigrants are often persuaded to pay exorbitant
rents for inadequate housing. As a result many of the new immigrants
pose a potent economic threat to the non-immigrant workers. Willingly
or otherwise, many immigrants would, if the law permitted, accept
rates of pay well below the prevailing levels. In the absence
of the NMW, it is likely that the lowest wages in Britain would
have continued to see the decline relative to the median employee
that was so evident in the years preceding 1999 portrayed in Figure
1. More importantly, the decline that was already evident in the
1990s would most probably have been exacerbated after 1999 as
a result of the unprecedented influx of immigrants.
Second, it could be argued that the NMW, by forcing up the
wages of the lowest paid in Britain, has actively encouraged the
high level of immigration that has recently been experienced.
There may be some truth in this, but it is unlikely to be a substantial
point. The average income levels of the countries from which most
of the recent migrants have been coming, whether China, Somalia,
Rumania or Poland, are so very much lower than in the UK—at
a quarter or even a tenth of UK levels—and their levels
of unemployment are so high. One can be confident that immigrants
would have been attracted in large numbers even if pay at the
bottom of the UK labour market had, unprotected by the NMW, fallen
substantially further.
Third, it has been important that the NMW has been strongly
enforced. Britain does not have an official labour inspectorate.
With the exception of health and safety at work and the NMW, individual
employment rights rely upon aggrieved workers taking action against
their offending employers, which is not very effective for those
in weak labour market positions. But the NMW is different because
it is enforced by Her Majesty's Revenue and Customs, the tax authorities,
who are experienced and respected as enforcers of the laws they
uphold. As a result, although undoubtedly some employers do cheat
their workers on the minimum wage, their numbers are probably
not large, and there is a general belief that the NMW is enforced.
There is also a new public body, called the Gangmasters' Licencing
Authority, to enforce various aspects of the law for labour agencies
in some sectors, most of which deal with migrant labour. In brief,
the law on the minimum wage, and some aspects of the employment
of immigrants, are subject to exceptionally close monitoring and
enforcement.
CONCLUSION
The recent influx of migrant labour has been greater, as
a proportion of the workforce, than Britain has ever experienced.
The threat this has posed to the income and employment of less
skilled non-immigrant workers has been especially acute. It is
probable that, in the absence of the NMW, wages at the lower end
of the income distribution, which were already deteriorating relative
to the median during the 1990s, would have subsequently experienced
additional deterioration as a result of the immigration.
What happened in fact was that the introduction of the NMW
in 1999 abruptly reversed the deteriorating position of the lower
paid. It established an effective and well-enforced "floor"
to wages. From 2003, the NMW was raised at a faster rate than
average earnings were rising, at a time when immigration was increasing.
Despite this influx of labour, as Figure 3 shows, between 2003
and 2006 the raising of the NMW achieved further improvements
in the relative earnings position of the lowest paid. Furthermore,
there is no evidence that these improvements in wages arising
from the NMW have damaged employment. The most affected sectors,
which are also sectors that have attracted substantial numbers
of immigrant workers, have seen both their employment, and their
share of employment, rise. In short, the NMW has been effective
in achieving its objectives, despite the substantial market challenge
of an unprecedented influx of migrants.
A reasonable speculation is that, in the absence of an NMW,
the recent wave of immigration would have had a damaging effect
on the relative pay of many less-skilled non-immigrant workers.
This has important policy implications. Likely popular responses
might have been civil unrest, petty nationalism, attacks on migrants,
and severe ethnic tensions in the more depressed parts, and among
the more discrimination-prone communities, of Britain. In brief,
had the NMW not been introduced in 1999, it is likely that these
adverse social consequences of immigration on the pay of indigenous
Britons would eventually have forced government to introduce something
very similar.
July 2007
17
The most recent of eight reports is National Minimum Wage:
Low Pay Commission Report 2007, London: The Stationary Office,
Cm 7056. These reports summarise the research work commissioned.
The research commissioned by the Low Pay Commission can be accessed
through the website (www.lowpay.gov.uk). Back
18
Dustmann, C., Frattini, T, and Preston, I., "A study of migrant
workers and the National Minimum Wage and enforcement issues that
arise", see website above. Back
|
