After a year of calls for the minimum wage to be set ‘higher’ from the unions and ‘lower’ from business, the Government this week appeared to play its cards right for business by opting for a cautious middle way.
Trade and industry secretary Margaret Beckett said last week that the national minimum wage for adults will be £3.60 an hour from April 1999. However, for 18-21 year olds, the minimum wage will be only £3.00 from April 1999, rising to £3.20 from June 2000.
Workers aged 16-17 and those on formal apprenticeships will be exempt from the minimum wage, which will be reviewed in 2000.
According to the Treasury’s macro economic model, a £3.60 minimum wage, covering employees over the age of 19, will add only 0.6% to the UK’s overall wage bill.
The Low Pay Commission estimates that the cleaning industry will have to add 3% to its wage bills and small companies employing fewer than 10 staff will see an average 0.9% rise in their wage bill.
In other words, about 2 million workers just under 10% of the workforce should get pay rises averaging 30%.
Adair Turner, director general of the CBI, describes £3.60 as ‘at the top end of what is acceptable for business. It should not place too much pressure on inflation or lead to major job losses, but it will inevitably have a significant effect on some industries and in some regions.
‘Any higher and we would be moving into more dangerous territory if we are to have a minimum wage, it must act as a floor to the labour market and not be aimed at significantly raising the general level of wages.
‘The level announced today allows for a reasonable and workable way forward.
David Yeandle, head of employment affairs at the Engineering Employers’ Federation, also welcomes the Government’s cautious attitude.
‘The level it has been set at will have no real direct impact on the engineering sector but it is the indirect knock-on effects which are hard to predict.
‘Our only real worry is the possible impact on wage differentials. The AEEU has already said it wants to ensure that internal wage differentials are maintained.
‘There is also the possibility of the increased costs borne by contracted out services such as cleaning which could be passed up the chain.
‘We are pleased the government opted for a low rate as it will lessen the impact of any knock-on effects.’
Yeandle’s reservations are echoed by David Metcalf, a member of the Low Pay Commission, who says that the Government is entering ‘uncharted waters’ with the minimum wage. ‘The knock-on effects are hard, if not impossible, to predict with any certainty,’ he says.
At a press conference last week, Beckett dismissed the idea that a minimum wage would lead to wage inflation. She asked if the audience knew how much the cleaners at their building were paid and the size of their last pay increase.
Stephen Machin, economics professor at the London School of Economics, agrees, saying other countries offer little evidence that a minimum wage stimulates wider demands for pay rises. However, he concedes that it is something of an unknown factor.
The only aspect of last week’s announcement to raise the blood pressure was the reduction in youth rates, which angered the unions. But the business community is quick to spring to Labour’s defence.
‘The Government’s caution on youth rates is understandable,’ says Turner. ‘It is an important area to get right, as if it is set too high, it may price young people out of jobs.
‘The initial £3.00 youth rate for 18-21 year olds, which will rise to £3.20 in July 2000, should ensure that this does not happen, as will the exemption for those under 18 years old.’
With UK inflation already edging upwards, any increase in prices caused by an upward flow of costs, or wage-inflation, would clearly be unwelcome.
It is perhaps no surprise that the Government opted for a low rate. As Alan Manning, professor of economics at LSE, says: ‘The Government opted for a low level, so the overall impact on the UK of the new wage is likely to be limited.’