Benefits Of The National Minimum Wage

Britain''s first ever National Minimum Wage (NMW) comes into force this April at a rate of £3.60 an hour for those aged 22 plus and £3.00 an hour for 18-21 year olds. According to Professor David Metcalf, writing in the February Economic Journal, the NMW will boost the pay of nearly two million employees by 30% on average. Half the people who will benefit are female, part-time workers.

Metcalf estimates that the NMW will have the following impact on the distribution of income, employment and exchequer finances:

  • Concentrating on working households, almost two-thirds of the gains from the NMW will accrue to households in the bottom fifth of the income distribution
  • The trade associations representing retailing and hospitality – which employ almost a half of those affected by the NMW – have welcomed the level of the NMW, so we can be reasonably confident that the £3.60 an hour rate will not have an adverse effect on jobs.
  • The NMW will have a broadly neutral effect on exchequer finances.

On the spending side, any savings on means-tested benefits will probably be offset by a small rise in the public
pay bill and higher charges for things like security and cleaning. On the revenue side, income tax and VAT will rise, but it is possible that this will be partially offset by a fall in corporation tax.

Metcalf, who is a member of the nine-strong Low Pay Commission (LPC) that unanimously recommended the rate to the government, describes the operation of the LPC, the major debates and the probable impact of the NMW on inflation, employment and household income distribution.

He notes that from its establishment in July 1997 to its Report a year later, the LPC engaged in an open consultation process. Written evidence was received from around 500 organisations and formal oral evidence was taken from 47 representative groups of employers, unions and pressure groups. The LPC visited 61 cities, towns and villages across the UK and held over 200 frank, open meetings during such visits. Margaret Beckett, then Secretary of State for Trade and Industry, described the LPC as a model form of social partnership.

In addition to the evidence gained during these visits around the country, three main factors influenced the choice of the NMW:

  • l The old piecemeal system of minimum wage protection – the Wage Councils – abolished in 1993 provided a benchmark for the NMW because there was no evidence that the minimum rates they set led to job losses.


  • International evidence on rates and coverage – high in France and lower in the United States, for example – provided helpful comparators.


  • The cost and coverage were crucial. The Bank of England and the Treasury certainly wanted the cost to be under 1% of the national wage bill (in the event, it is 0.6%) and international evidence pointed to an upper limit on coverage of around 10% (the out-turn is 9%).

A lower youth rate was the most controversial matter discussed and recommended by the LPC. It was felt that youngsters'' lower productivity and higher unemployment justified a lower NMW. From April, this applies to those aged 18-21 (16 and 17 year olds are completely exempt) but the LPC have been asked to decide whether, from 2000, those aged 21 should be paid the adult or youth rate.

At the beginning of this century, Harold Spender argued for a ''plimsoll line for labour as well as ships – a line to limit the extent of peril and suffering to which a worker is to be liable''. As the century ends, Metcalf notes, British employees have at last achieved that plimsoll line.

''The Low Pay Commission and the National Minimum Wage'' by David Metcalf is published in the February 1999 issue of the Economic Journal. Professor Metcalf is Deputy Director of the Centre for Economic Performance (CEP) at the London School of Economics; and a member of the Low Pay Commission, a statutory body charged with recommending and evaluating the NMW. Its first Report was The National Minimum Wage, CM3976, June 1998.