National Minimum Wage Act 2015 Essay

The national minimum wage in the UK sets minimum hourly rates that employers must pay their workers. It covers almost all workers in the UK. There are three age-based rates and an apprentice rate, which are set in October every year by the by the Chancellor of the Exchequer and enforced by HM Revenue & Customs (HMRC). The minimum wage is based on gross pay, before tax and national insurance are deducted.

There are no variations or exclusions based on region, size of employer, industrial sector or occupation. Workers cannot be excluded on the basis of their hours of work, employment pattern, length of service or contract status.

There are some categories of workers who are excluded from the minimum wage. These include workers who are self-employed, those who are under the school-leaving age, who live in their employers’ homes (domestic workers), interns, volunteers and students on work placement schemes as well as  members of the employer’s family and prisoners.

History of the struggle for a statutory minimum wage in the UK

Until the early years of the 20th century, wage rates were freely determined by the employer because trade unions were in their infancy and did not engage in collective bargaining over wages. This led to very low wages in some industries, and for particular categories of workers like women and children.

In 1909, the Trade Boards Act created four Trades Boards that set minimum wages for industries where wages were particularly low - ready and bespoke tailoring, paper box making, lace finishing and chain making. This system was extended to the service and manufacturing sector through the creation of wage councils in 1945. Throughout the 20th century, minimum wage rates were set by different trade associations, and trade unions campaigned on behalf of their members over the minimum wage rates for particular occupations.

The Labour government enacted the National Minimum Wage Act 1998, which came into effect on 1st April 1999. This move was then widely opposed by industry representatives who predicted - wrongly as it turned out - that setting a legally enforceable minimum wage would have an adverse effect on employment levels. Today all political parties are committed to the national minimum wage.

The law on national minimum wage in the UK (2013)

It is against the law to pay less than the national minimum wage. Workers who are being paid below the national minimum wage can take their employer to court for backdated wages going back 6 years. 

From 1 November, 1998 it has been against the law to dismiss or victimise someone because they are eligible for the national minimum wage. This prevents employers from replacing workers who are entitled to the minimum wage with those who qualify for a lower rate or are excluded altogether.

The Employment Act 2008 strengthened the penalties that could be levied against employers found to be paying less than the national minimum wage. In addition to the backdated wages, this act introduced an automatic penalty for employers who fail to comply with the national minimum wage, which came into force on 6 April 2009. However, this penalty is capped at £5,000 and is halved if an employer complies fully with a notice of underpayment within 14 days of service. Since 1 January 2011,  the Department of Business, Innovation and Skills (BIS) have been able to name and shame by press release, employers who fail to adhere to national minimum wage law.

Problems and issues for the future

Several years after the introduction of a statutory minimum wage, research indicates that agency workers, migrant workers, domestic workers, those paid by piece rates, care workers and workers in sectors like catering and hospitality continue to be paid below the minimum wage.

Though the minimum wage is a legal requirement, enforcement remains a big issue. The compliance teams, whose job it is to investigate and remedy any breaches of this legislation are very small. The average time taken from complaint to enforcement remains too long:  the time taken from the registration of a complaint by a worker to the closure of a case ranged from between 79.5 to 198.6 working days in 2011  (House of Commons written answers for questions posed on 12 July 2011, pt 0003).

However, by far the biggest issue is that the national minimum wage is not an adequate wage on which a worker can have a decent living standard. Because the minimum wage is set at such a low level, linked more to benefit levels than average earnings, as well as because of poor enforcement, some families remain in poverty despite having members who work. Research by Kenway (2008) for Joseph Rowntree Foundation shows that more than 50% of children living in poverty live in households where there is someone in work.  Many campaigners, unions, working groups and employers now favour the payment of what they call a “Living Wage”. In October 2012, the accountancy firm KPMG (which supports the living wage idea) reported that 20% of all workers in the UK, nearly five million people, are paid below it.

Explain

The living wage

The living wage is an hourly rate calculated according to the basic cost of living in the UK and set independently and updated annually. It is a calculation of the minimum pay rates needed to let workers lead a decent life taking into account the cost of living including housing, transport, childcare, council tax and other necessities in London and other parts of the UK.

The UK Living Wage is calculated by the Centre for Research in Social Policy. The London Living Wage is calculated by the Greater London Authority. The figures for the current hourly living wage in Greater London and in other parts of the UK are available at: http://www.livingwage.org.uk/

Employers choose to pay the living wage on a voluntary basis.  A broad coalition of trade unions, church groups, community organisations and charities like the Living Wage Foundation and CitizensUK have campaigned for a living wage for workers. They have used social sanctions, media publicity, petitions, and in the case of big business, tabled questions at public events like their Annual General Meetings to raise the issue of a living wage. Additionally, the trade unions have also backed strike action and actions short of a strike to fight for a living wage for their members.

Some of the employers who pay the Living Wage include universities in London (Queen Mary’s, SOAS, Birkbeck); the Cardiff, Birmingham, Newcastle and Norwich local authorities; and TFL for its cleaners since 2010. In 2012, the Houses of parliament were in the news over the campaign by cleaners working there for a living wage.

A 'National Living Wage' announced in 2015: Surely this is good news?

A surprise announcement made by the Tory Chancellor George Osborne in the 2015 budget was a new 'National Living Wage' to be introduced the following year (2016) of £7.20 per hour. Surely this is good news?

Firstly, the so-called 'national living wage' is not a living wage. The concept of a living wage is based on what it takes for an average family to meet the basic cost of living, which is different across the UK. For example, travel costs and rents are vastly greater in London, which the living wage reflects. So one uniform 'national' living wage cannot reflect the varying costs of living across the country.

Secondly, the living wage is set every year and takes into account the inflation and other changes in the economy that effect living costs. It is therefore not possible to set a figure for a living wage in advance.

Additionally, the proposed amount of £7.20 per hour in 2016 was the prescribed living wage for UK in 2011 (in that year the London living wage was £8.20). The actual living wage in 2015, when the statement was made, was £9.15 in London and £7.85 elsewhere. So the amount proposed for the future falls far short of the real living wage even today.

It would be far more accurate to describe this as a rise in the national minimum wage.

By calling it a 'national living wage' Osborne has co-opted the label of 'living wage'. In some ways this indicates the acceptability of the concept of living wage and the success of the campaign for a living wage. However, it is also a dangerous dilution of the concept and threatens to undermine it by deliberately mis-applying it. Several newspapers lauded Osborne's announcement without questioning the use of the term 'living wage' for what is clearly not a 'living wage'.

IssuesNational Minimum wageLiving Wage
DefinitionThe national minimum wage is the least that an employer can legally pay a worker, per hour, for any work they do for them.The living wage is an informal benchmark, not a legally enforceable minimum level of pay, like the national minimum wage.
What was it in 2012?For 2012, the national minimum wage was:

Aged 21 or over: £6.19 per hour
Aged 18-20: £4.98 per hour
Aged 16-17: £3.68 per hour
Apprentices under 19 or aged 19 or over in their first year: £2.65 per hour

For 2012, the living wage is now set at £8.55 an hour in London and £7.45 an hour in the rest of the UK.
What happens if an employer pays below this rate?They are breaking the law. The worker has the right to take them to court and claim backdated wages.Campaigners can use social sanctions against employers who pay low wages.
How many employers pay this?Compliance remains high, but particular sectors and particular categories of workers are exploited by employers.80% of workers are paid above this rate.

Explain

What are the gaps in the existing law on the national minimum wage and how effective is this law in protecting all workers? 

When I started studying the minimum wage 25 years ago, like most economists at that time I expected that the wage floor reduced employment for some groups of workers. But research that I and others have conducted convinced me that if the minimum wage is set at a moderate level it does not necessarily reduce employment. While some employers cut jobs in response to a minimum-wage increase, others find that a higher wage floor enables them to fill their vacancies and reduce turnover, which raises employment, even though it eats into their profits. The net effect of all this, as has been found in most studies of the minimum wage over the last quarter-century, is that when it is set at a moderate level, the minimum wage has little or no effect on employment.

For example, David Card of the University of California, Berkeley, and I found that when New Jersey raised its minimum wage from $4.25 to $5.05 an hour in 1992 (or from about $7.25 to $8.60 in today’s dollars), job growth at fast-food restaurants in the state was just as strong as it was at restaurants across the border in Pennsylvania, where the minimum wage remained $4.25 an hour. Equally important — but less well known — within New Jersey, job growth was just as strong at low-wage restaurants that were constrained by the law to raise pay as it was at higher-wage restaurants that were not directly affected by the increase since their workers already earned more than the new minimum.

I am frequently asked, “How high can the minimum wage go without jeopardizing employment of low-wage workers? And at what level would further minimum wage increases result in more job losses than wage gains, lowering the earnings of low-wage workers as a whole?”

Although available research cannot precisely answer these questions, I am confident that a federal minimum wage that rises to around $12 an hour over the next five years or so would not have a meaningful negative effect on United States employment. One reason for this judgment is that around 140 research projects commissioned by Britain’s independent Low Pay Commission have found that the minimum wage “has led to higher than average wage increases for the lowest paid, with little evidence of adverse effects on employment or the economy.” A $12-per-hour minimum wage in the United States phased in over several years would be in the same ballpark as Britain’s minimum wage today.

But $15 an hour is beyond international experience, and could well be counterproductive. Although some high-wage cities and states could probably absorb a $15-an-hour minimum wage with little or no job loss, it is far from clear that the same could be said for every state, city and town in the United States.

More logical is the proposed legislation from Senator Patty Murray, Democrat of Washington, and Robert C. Scott, Democrat of Virginia, calling for raising the federal minimum wage to $12 an hour by 2020. Their bill is co-sponsored by 32 senators, and supported by President Obama and Hillary Clinton. High-wage cities and states could raise their minimums to $15.

Although the plight of low-wage workers is a national tragedy, the push for a nationwide $15 minimum wage strikes me as a risk not worth taking, especially because other tools, such as the earned-income tax credit, can be used in combination with a higher minimum wage to improve the livelihoods of low-wage workers.

Economics is all about understanding trade-offs and risks. The trade-off is likely to become more severe, and the risk greater, if the minimum wage is set beyond the range studied in past research.

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