The National Minimum Wage

In this post PAGE Staff members Paul Wetherly and Dorron Otter explore the National Minimum Wage through an extract from their forthcoming book.

Paul Wetherly
Paul Wetherly

The national minimum wage – fifteen years on

The national minimum wage, established in 1999, was one of the most important achievements of the New Labour government. Of course the impact of the policy depends on the level at which the NMW is set, and in this respect the policy has been too cautious. It has never been high enough to protect against poverty, and since the financial crash its real value has been allowed to fall. This shows the need for continuous political pressure to improve the level of the minimum wage, and the importance of the campaign for a living wage. However the importance of the policy is to establish the principle of a legal minimum, and it has successful in the sense that this principle has become institutionalised. All progressive reforms are vulnerable to being rolled back when the balance of political forces shifts, but this seems very unlikely in the case of the minimum wage in the foreseeable future. Osborne’s support for restoring the real value of the minimum wage is welcome confirmation of this, even though based on a calculation of narrow political advantage (http://www.theguardian.com/society/2014/jan/16/george-osborne-backs-minimum-wage-rise). This case study looks at the minimum wage and the campaign for a living wage and puts them in an international context.  It is an extract from the forthcoming edition of Wetherly, P & Otter, D (2014) The Business Environment: Themes and Issues in a Globalizing World, Oxford University Press.

The Business Environment by Dorron Otter and Paul WetherlyGuiding the ‘hidden hand’—the minimum wage and the ‘living wage’

The idea of the ‘hidden hand’ is a metaphor for the way the market system, though based on millions of independent decisions and not subject to overall plan or control by any actual hand, does not degenerate into chaos but operates in a highly coordinated way. It is as if a hidden hand is guiding it.

Adam Smith argued in the 18th century that even though businesses may be concerned only with their self-interest (profit) they would be guided, by and large, to serve the public good. This seems like a paradox—promoting the common good by acting selfishly. Smith’s argument was that it would only be by serving the needs of others (customers) that businesses would be able to make a profit. When businesses throughout the economy act in this way the result is that the supply of goods and services matches consumer demand.

Watch Dorron Otter at TedX in Leeds

The hidden hand of the market operates through the price mechanism. The price adjusts until balance is achieved between supply and demand. For example, if supply exceeds demand the price will tend to fall, and vice versa.

However, the hidden hand can produce outcomes that are not socially desirable or fair. In a market system profit-seeking businesses respond to ability to pay—it is not their purpose to act like charities. The problem is that the price determined by the hidden hand might be one that not everyone can afford to pay because of differences in levels of household income. Perhaps it doesn’t matter that not everyone can afford a BMW, but it is more serious if some people cannot afford health care when they need it.

In labour markets price is the wage or salary that people receive for the jobs they perform. In this case the problem is that for some low paid occupations this price might not be sufficient to enable people to have a decent standard of life.

One solution to this problem is to use the law to guide the hidden hand through price controls. The UK Labour government introduced a National Minimum Wage (NMW) in 1999. The then Department for Trade and Industry explained the rationale of the NMW in terms of fairness and creating a level playing field on which businesses compete:

The national minimum wage is an important cornerstone of government strategy aimed at providing employees with decent minimum standards and fairness in the workplace.

It applies to nearly all workers and sets hourly rates below which pay must not be allowed to fall. It helps business by ensuring companies will be able to compete on the basis of quality of the goods and services they provide and not on low prices based predominantly on low rates of pay.

There are different levels of NMW, depending on age, and these rates are reviewed annually by the Low Pay Commission, taking account of economic circumstances.

From 1 October 1212 the NMW rates were:

Adult Rate 
(for   workers aged 21+)

Development Rate 
(for   workers aged 18-20)

16-17 Year Olds Rate

Apprentice Rate

£6.19

£4.98

£3.68

£2.65

Source: Low Pay Commission (http://www.lowpay.gov.uk/lowpay/index.shtml. Accessed 14 February 2013)

Although controversial when first introduced, being supported by the trade unions and opposed by the Conservative party and business, the minimum wage has now become an accepted part of the business landscape in the UK supported by all the main political parties.

A ‘living wage – an idea whose time has come?

The minimum wage does not, by itself, protect against poverty, defined as 60% of median income. Does fairness in the jobs market require something more? In 2013 Citizens UK launched a campaign in support of cleaners employed at John Lewis stores on the minimum wage. John Lewis is a partnership in which all employees receive a share of the profits in the form of an annual bonus (John Lewis partnership). In 2013 the bonus was 17% for all employees from the highest to the lowest paid within the partnership. But the cleaners did not get a bonus because they were not partners but employed by a contract cleaning company. Some people felt this arrangement was unfair and not in keeping with the ethos of the partnership. After all, a cleaner who had worked for the whole year had contributed to the success of the business in just the same way as a partner working as a sales assistant or in any other role. Citizens UK, an alliance of community groups including London Citizens, was campaigning for John Lewis to pay the cleaners a living wage (Rajan, 2013; Citizens UK). This is a rate of pay that is higher than the NMW, set independently of government and with no statutory force, that is calculated as ‘the minimum pay rate required for a worker to provide their family with the essentials of life’ (Citizens UK). In London in 2013 the rate was set at £8.55 per hour, and £7.45 outside London, significantly above the NMW (The Guardian, 2012).

The living wage is supported by all three main political parties, and was described by David Cameron as ‘an idea whose time has come’. It is an idea that the ‘going rate’ for a job, as determined by the market, and fairness are different things, and that paying a living wage should be seen as a social obligation on the part of business. Citizens UK campaigns to persuade John Lewis and all other employers to agree to pay the living wage, with the ultimate goal that no worker in the country should be paid less. There is some way to go: a study by KPMG in 2012 found that 4.82 million workers in Britain (about one-fifth of the workforce) are paid less than a living wage (Weaver, 2012).

How does the UK minimum wage compare to other nations?

Minimum wage policies have been implemented in many other countries, including developing countries such as Brazil, India and China (International Labour Organisation, 2013). Table 1.1 shows how the UK minimum wage compares with a number of other developed countries. The calculation using purchasing power parities is designed to be a more realistic comparison of what the minimum wage can purchase in the different countries. In broad terms it might be expected that the minimum wage would reflect the level of average income (GNI per capita) in particular countries (because richer countries are able to pay a higher minimum wage), but table 1.1 shows that the United States has a relatively low minimum wage (rank 9 of 13) despite being one of the world’s richest countries. This shows that the minimum wage also reflects national political judgements about the appropriate level, which can be more or less generous.

Table 1.1. Comparison of Adult Minimum Wages by Country, using exchange rates and purchasing power parities (PPPs) (2011), and Relative to Full-time Median Earnings (2010).

In UK £   (at Sept 2001 exchange rates In UK £   (PPPs, at Sept 2011) PPP Rank   order Relative   to full-time median earnings (mid-2010) Rank order   relative to median earnings
Australia 10.05 7.73 2 51.8 4
Belgium 7.12 6.98 4 51.7 5
Canada 6.20 5.90 8 45.0 8
 France 8.01 7.86 1 60.1 1
Greece 3.66 4.16 11 41.9 10
Ireland 7.54 6.86 5 51.9 3
Japan 6.08 4.83 10 37.0 13
Netherlands 7.22 7.37 3 43.6 9
New   Zealand 6.69 6.31 6 59.1 2
Portugal 2.44 2.87 13 48.0 6
Spain 3.23 3.62 12 37.6 12
UK 6.08 6.08 7 46.1 7
US 4.59 5.67 9 38.8 11

Source: Low Pay Commission, 2012, p.174 Table A3.1 & p.175 Table A3.2

Thus the United States comes towards the bottom of the sample of countries (rank 11) in terms of the generosity of the minimum wage as a share of median earnings. France has the most generous minimum wage both in terms of purchasing power and share of median earnings. The least generous country (relative to median earnings) is Japan: although workers on the minimum wage in Japan are better off in purchasing power terms than their counterparts in Portugal, they are likely to compare themselves with those on median earnings in their own country and on this measure the Japanese are worse off than the Portuguese. The UK is middle-ranked both in terms of the purchasing power of the minimum wage and its share of median earnings.

What is fair in poor countries?

Table 1.1 suggests that what is regarded as fair varies from one country to another. It might be argued that what is fair has to be related to the average wages and living standards in a country because they influence the prevailing ideas or norms in that society about what constitutes a decent life. On this basis a fair minimum wage in a rich country would be higher than in a developing country with a lower standard of living such as India. Even between countries with comparable income levels, such as in table 1.1, it might be argued further that different nations decide for themselves what is fair on the basis of their own values. On this basis France has a more generous minimum wage than the United States because it has a different culture with a different idea of fairness. For example, a more individualistic culture in the United States might translate into support for the idea that it is fair for incomes to be determined by how well people do on the basis of their own efforts in the market.

In a globalizing world national minimum wage policies increasingly take on an international dimension. This is partly because minimum wages have to take into account the potential economic impact in terms of competitiveness and employment in firms producing internationally traded outputs. The consideration here is of a trade-off between fairness and competitiveness. Another aspect of a globalizing world is the growing awareness of income disparities between countries, and particularly of global poverty. In this context international and global ideas of fairness are coming to the fore. For example although minimum wage policies in the European Union are the preserve of member states to decide for themselves (eg, Germany has no minimum wage), it is also debated at the European level. For example, the European Commission has expressed the view that “setting minimum wages at appropriate levels can help prevent growing in-work poverty and is an important factor in ensuring decent job quality” (see European Commission 2012, p. 9). British workers on the minimum wage might wonder why European Union membership shouldn’t mean that they are treated as generously as their French counterparts.

Within the EU there is a tension between the idea that member states should decide their own minimum wage policies for themselves on the basis of their levels of productivity and competitiveness and their own ideas about fairness, and the integrationist idea that all workers in the EU should benefit from the same protections. What about a developing country such as Bangladesh with which the UK has no such relationship? Should we be concerned about the level of wages and minimum wage protections in such countries? In a globalizing world such concerns have grown, partly because in a world of instant communication people in the West have become much more aware of global disparities in living standards and wish to ‘make poverty history’ (to use Oxfam’s campaign slogan). We increasingly regard the poor in developing countries who we see on our TV screens as ‘people like us’ and we share their concerns. People in rich countries are also increasingly aware of the interconnections between rich and poor countries through trade and global supply chains managed by Western companies. For example, when cheap clothes in the West are made possible by low wages in poor countries we might feel that western companies sourcing their products from low-cost producers in countries like Bangladesh have a responsibility for the plight of the low-paid workers in their supply chains, and that we share that responsibility as customers. These considerations were brought to the fore in 2013 by the deaths of more than one thousand Bangladeshi garment workers in the collapsed Rana Plaza factory building (BBC, 2013b)

It could be argued that western companies are not responsible for low wages in the developing world, since workers are being paid the ‘going rate’ as determined by economic conditions in those countries. It is simply rational behavior for companies in competitive global markets to source their products from the cheapest suppliers. Furthermore, workers in manufacturing may have higher incomes than those in the agricultural sector. However the problem is that the price set in the market – the ‘going rate’ for factory work – is insufficient to provide a decent standard of life. One way of defining a decent standard is to use an international measure of poverty. For this purpose households with daily per capita income below US$1.25 or $2 (calculated on PPP basis) are classed respectively as in extreme or moderate poverty (International Labour Organisation, 2013). The ILO estimates that ‘out of a total number of approximately 209 million wage earners .. in .. 32 developing countries at different points in time from 1997 to 2006, about 23 million were earning below US$1.25 a day and 64 million were earning less than US$2 per day. This indicates that minimum wages .. remain a relevant tool for poverty reduction’ (2013, p.38). Therefore ‘the ILO encourages member States to adopt a minimum wage to reduce working poverty and provide social protection for vulnerable employees’ (2013).

Some developing countries have minimum wage policies, but these are not always adequately enforced or set at a sufficient level to tackle working poverty. The charity War on Want campaigns for a living wage for all workers. A study of the Bangladeshi garment industry reveals the low pay and poor working conditions experienced by the mainly female workers employed as sewing operators and helpers, the lowest paid jobs in the industry. Under the country’s minimum wage law the monthly pay of sewing operators starts at £32 per month but this is often paid only if production targets are met, and meeting the targets requires the women to work excessive hours. In any case the minimum wage falls well short of the living wage, calculated at £42 per month, an amount intended to ‘enable workers and their dependants to meet their needs for nutritious food and clean water, shelter, clothes, education, health care and transport, as well as allowing for some discretionary spending’ (War on Want, 2012).

According to War on Want, working poverty in the Bangladeshi garment industry can be attributed to the business model used by British and other western companies:

‘Many British companies source their clothes from Bangladesh because the country boasts lower labour costs than anywhere else in the world. High street retailers such as Primark, Tesco and Asda have long benefited from these cheap prices, in the full knowledge that workers in the Bangladeshi garment industry are regularly denied their basic rights. The huge profits made by these retailers depend on the exploitation of the women who make their clothes’ (War on Want, 2011). The charity also names a further 26 high street brands which do not ensure a living wage is paid to workers in their supply chains (2012).

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