History of the National Minimum Wage in the UK - Coursework Example

Introduction

The history of the minimum wage in the UK is a long-stretching phenomenon, dating back to the end of the 19th century and the early 20th century. Nevertheless, beginning 1890, there was only a form of wage control imposed by the Fair Wages Resolution of 1891 (Chalabi, 2014). The resolution concerned government contracted employers, who had an obligation regarding the minimal payment for their staff. Recognizing the impact of the minimum wage rate policies on living requires understanding this policy in the UK context beginning its 20th century reform.

The minimum wage debate has been at the forefront of national politics for decades and the debate seems unlikely to abate anytime soon. In the UK the Conservative Party has been a long term opponent of the minimum wage, claiming that it takes toll on employers due to extra costs incurred in the production process, thus leading to unemployment as a cost-cutting measure. On the other hand, the Low Pay Commission has termed the assertion to be wrong since there is little evidence of significant adverse effects of the minimum wage, on employment (Low Pay Commission , 2007). In either case, it seems that it is an issue that brews controversy, within the UK and is often supported by empirical studies.

A study carried out in 2013 by the Federation of Small Businesses, showed that two out of ten of small businesses said the rise in national minimum wage had negative impact on their companies (Tobin, 2010). The report states that small businesses are often forced to forgo expansion plans given their limited capacity to pay more workers and undertake development projects, as a result of the large wages they have to pay their works. It is thus a suggestion that businesses, especially small ones, be exempt from the wage cap, to permit growth. However, proponents argue that there is more headroom to pay more wages despite complaints by employers (Card & Krueger, 2015). This is especially the case when analysis of the wages of of senior executives are studied. Companies often offer huge pay packages and bonuses to the executives that could go a long way in meeting the wage demands of the companies.

Some previous studies have explored the relationship between minimum wages and life in London. Bargain, Doorley, and Van Kerm (2011) review the impact of these wages on the differential in payments that are based on gender. Through the comparison of rates before the national minimum wage and after the official policy introduction, the study effectively documents the trends and possible impact. Other studies explore the possible effect on inequality groups, including Coats (2004) and Metcalf (2006). These studies imply that the minimum wage policy significantly influences the trends in living styles, especially in the groups with relatively low income. The studies also feature the possible influence of further raising the minimum wage rate. However, it dominantly appears that the impact is only in these groups, but the long term effect is difficult to assess especially on higher income segments of the economy.

Understanding the effects of the minimum wage rate on various economic groupings will facilitate the determination of future directions of this policy. The paper reviews the changes, and attempts to understand the impact from the perspective of different interests. Clearly, the policy has had differing impacts on wage rates and unemployment, albeit not in equal portions across classes, gender, or race. Based on evidence from prior assessments, it is clear that while the minimum wage has influenced shifts in gender, class, and race inequality; its impact on unemployment has been minimal.

Historical Overview of Minimum Wage

December 1909 saw the introduction of minimum wage and the creation of Trade Boards in Britain. Beginning two decades earlier, the country had operated under the wage control of the Fair Wages Resolution (Coats, 2004). The trade boards introduced in 1909 within the UK were converted into Wage Councils by 1945 (Coats, 2004). For most of the period between the 1950s and the late 1970s, there was barely use of these councils. Most of them ceased functioning reducing representation to about 2.9 million in 1990 down from 3.5 million in the 1940s (Tobin, 2010). Eventually, the Wage Councils were abolished in 1993. The country largely relied on collective bargaining, as both trade unions and employers regarded national minimum wage as a hindrance (Coats, 2004).

However, after the abolition of the wage councils, the UK demonstrated a steep increase in the number of unpaid workers in the country. Following an assessment of lowly paid workers in parts of the country indicated long hours and wages barely sufficient to maintain a living. Consequently, 1997 saw the introduction of the National Wage Bill in Parliament (Chalabi, 2014). The first official legislation providing for the minimum wage rate, The National Minimum Wage Act of 1998, was assented in 1998, and addressed the wage compensation of all workers in the UK (Tobin, 2010). It extended to workers in the agricultural industry, who had been neglected for some time, and also provided for their working under minimum rates. The law also added a regulatory framework for the Low Pay Commission, which was already in existence beginning 1997 and already made recommendations on minimum wages (Tobin, 2010).

Minimum Wage and Life in London

From a political perspective, the minimum wage rate has been termed as a resounding success. However, this effect is assessable from the influence it has had on people from different classes, gender, and races within the UK. At the point of introduction in 1998, the minimum wage was about £3.60 for adults above 21 and £3 for those aged between 18 and 21 (Chalabi, 2014). The rates have been constantly reviewed in the years since, giving different classifications and wages for the groups. Currently, the minimum wage for apprenticeship is £2.68; £3.72 for 16-17 year olds, £5.03 for 18-20 year olds, and £6.31 for adults above 21 (Chalabi, 2014). These groupings and wages are also likely to change, as they are subject to reviews depending on the economic status.

Changes in the National Minimum Wage

Since 1999, the minimum wage rate has changed by about 72% (Card & Krueger, 2015). This is a significant variation, considering the workers average pay has only changed 50% while price increases have reached 45% since 1999 (Card & Krueger, 2015). Beginning several years after the implementation of the 1999 national minimum wage, the impact on unemployment, or employment, remains inconclusive. There is usually little effect on employment following the implementation of the national minimum wage. However, unemployment tends to increase among the affected groups (Metcalf, 2006).

Further, there has been evidence that the NMW causes a decrease in work hours per week by either 1 or 2 hours (Coats, 2004). This reduction is made due to the effort by employers to balance their output with the requirement for higher compensation costs (Coats, 2004). In this regard, employers may opt to demand more efficiency from staff, causing their hiring more quality employees instead of lower quality while working longer hours. Further, the use of piece rate production systems may cause production per hour to increase, resulting in less hours worked and thus lower compensation than before the NMW (Bargain, et al., 2011).

The NMW also resulted in higher chances of unemployment among part-time female workers during the recession. This is the most vulnerable group to the changes in employment necessitated by the NMW, as they form the majority low-paying occupation workers. 10% of female part-timers are paid the minimum, while only 3% of full time female workers are paid the minimum (Coats, 2004). During the recession, their chances of unemployment were 3% higher than if the recession occurred in the absence of the NMW (Tobin, 2010).

The outcome of minimum wages tends to differ, with the NMW displaying more bite in poor regions against richer areas in the UK economy. This effect is constantly attributed to the poor areas having more people in the low income decile than the rich areas, and consequently experiencing a more significant shift in the income received after such policy changes (Card & Krueger, 2015). Arguments indicate that the NMW is not expected to reduce poverty within an economy, based on the understanding that the poorest in such economies are not employed (Coats, 2004). Further, the effect of the NMW becomes difficult to assess because there are other measures involved in mitigating such poverty. Further, the effect of the NMW has to feature the position of women, considering their large composition in this low income grouping (Coats, 2004).

Expected and Actual Impact on Living

The introduction rate of the NMW was set at £3.60, and targeted to offer an annual benefit to about 2 million employees in the UK (Coats, 2004). The benefit, however, was way lower and only reached 1.5 million employees. In consequent years, the rate declined to 1 million and 1.1 million, causing judgment that the national minimal wage was too low (Coats, 2004).

The impact of the National Minimum Wage especially concentrates on particular groups. For instance, the effect is focused on low income earners, featuring mostly occupations such as retail, social care, and hair dressing (Low Pay Commission , 2007). These groups have majority women presence. More than a third of the beneficiaries of the NMW are found at the bottom of the classifications on income distribution (Metcalf, 2006). As such, it offers the potential to improve the welfare of the working poor. With the NMW having risen to acceptable levels, it is now comparable to other countries, especially in the OECD, with similar policies (Low Pay Commission, 2013).

Minimum Wage and Gender Pay Gaps

The proportion of women engaged in low-paid work in the UK economy is disproportionately high in comparison to their male counterparts. Since the 1980s, the pay gap between men and women has been reducing, but there still remains an elaborate difference in the level of income (Bargain, et al., 2011). Education and experience have often been identified as the main factors for this differential, with women having lower levels of attachment to the labour market due to their familial obligations. The National Minimum Wage (NMW) is expected to increase the incentive for women to find employment, and remain in paid labour (Coats, 2004).

In 1994, the gender pay gap of the UK was 27% (Card & Krueger, 2015). Immediately after the execution of the NMW in 1998, the gap declined to 17.8%; and by 2015, it had declined to 13.9% (Card & Krueger, 2015). However, between 2005 and 2011, there was an increase in the gap all the way to 19% due to the effects of the recession (Bargain, et al., 2011). Understanding the shifts in these trends, either in form of employment or in the rate of wages, connects directly to the shifts imposed by the national minimum wage. The degree of employment attraction and changes in working hours are at the heart of these improvements (Card & Krueger, 2015).

Minimum wage workers are disproportionately women. The NMW affected minimum wage workers more than it did the higher portions of the economy composition, of which two thirds comprise of women (Low Pay Commission , 2007). Women working part-time have especially benefited from the presence of the minimum wage rate. According to a study in 2006, 40% of women worked part time while only 6% of men worked in the same terms of employment (Low Pay Commission , 2007). This condition results in about 55% of the low-paid workforce being composed of women and less than half being men. Low-paying occupations such as hair dressing and social care overwhelmingly employ women (Coats, 2004). Their probability of occupying managerial positions are also significantly lower (Coats, 2004). As such, following the introduction of the policy, more women were raised to a higher wage rate than the number of men whose wages increased.

A positive effect of the minimum wage on the gender pay gap was visible in the initial years following the introduction of the policy. The mean pay gap rose slightly from 19.6 in 1997 to 20.1 in 1998, a transformation before the minimum wage. However, between 1998 and 2006, there was a consistent decline to 16.5 (Bargain, et al., 2011). The change could be directly attributed to changes in the wages and the extent of female employment. Nevertheless, following the recession, attributing the changes in gender gaps in pay became difficult due to the wider set of economic factors (Bargain, et al., 2011).

There has been considerable convergence in the earnings of low paid men and low paid women (Bargain, et al., 2011). However, the gap remains persistent in women earning higher levels of income and their male counterparts. This is especially visible in areas such as banking and law, where majority of the staff are men (Low Pay Commission, 2013).

However, some of the literature indicates minimal effects of the National Minimum Wage on the overall gender wage gap in the UK. While generally, women in the lower income groups have increased in their work hours and pursuit of employment, the gap has not closed in higher levels of income. For instance, three years prior to 2006, there was a decrease to 6.4% in the lower decile, while the upper decile experienced a consistent increase (Metcalf, 2006). There has been little change in the degree of payment overall, as the effect on labour tends to take both the form of seeking employment and hours worked. Employers, while increasing the level of pay per hour, will require higher efficiency and thus reduce the amount of hours that potential workers perform (Metcalf, 2006). The approach translates into a much reduced cumulative income. Further, women higher up in the pay grade will be unlikely to be influenced by these changes in the wages (Bargain, et al., 2011). Consequently, the gender gap effect remains minimal, and may even be negative in some years since the implementation of the policy.

As such, while some of the statistics indicate the minimum wage rate as having improved the lives of women in the UK, it is possible that the overall effect is insignificant. The conclusions vary, created by regional differences in the proportion of women in the low income grouping as well as counterfactual factors in the economy (Bargain, et al., 2011). Nevertheless, the most visible outcome seems to be a definite increase in the women willing to join paid employment (Card & Krueger, 2015). This is in contrast to the expectation that the changes to introduce the NMW affected the gender pay gap.

Class and Race

Relationship between Ethnicity and Class

About 2/5 of ethnic minorities in the UK are in the low-income bracket. Only 20% of the white population in the UK lives in the low income zone, compared to numbers like 70% of the Bangladesh community (Palmer, 2015). The early 2000s recorded a decrease in the proportion of ethnic minorities living in low income communities, but the number has been consistently rising after the recession (Palmer, 2015). The rate of low income living among ethnic minorities in London is higher than in the rest of the UK (Card & Krueger, 2015). This suggests that, while overall minority ethnic groups have lower income, this differential is more pronounced in this city.

The NMW Impact on Class and Ethnicity

Majority of ethnic minorities are concentrated in London, availing a wider range of job groups and consequently increasing the possibility of their being in the lower income sections (Metcalf, 2006). Some factors influencing their being subjected to these wage rates include their choice of jobs, the lower weight of overseas qualifications in London, and the possibility of discrimination by the employer. While the minority groups are likely to experience lower wage rates, these rates vary across the groups. Currently, the most consistently low rates are among minorities of Bangladesh and Pakistani background (Low Pay Commission, 2013).

Between 1998 and 2004, the pay gaps between the ethnic minorities and the white majority fluctuated slightly, but remained consistently the same (Tobin, 2010). The increase in earnings among the white majority was about 27%, closely matched by 26% increase in earnings among the minority groups (Low Pay Commission , 2007). However, an overall analysis of the pay gap beginning 1998 to 2008 indicates a decline in the gap by about 10%. The National Minimum Wage, introduced in 1998, compressed the wages of the lowest paid groups. This change was likely to affect positively the ethnic minorities, who have larger numbers in this low income division (Card & Krueger, 2015).

Notably, 8.6% of employees from minority groups are covered by the changes in the National Minimum Wage, against only 6.5% of white employees (Low Pay Commission, 2013). Chinese and Asian communities are the most affected by the wage policy, while the black population portrays less responsiveness to the implications of the NMW (Card & Krueger, 2015). The groups, however, also report high rates of non-compliance among their employers. The Asian and Chinese groups tend to work in the hospitality industry, which records high degree of non-compliance with the NMW (Coats, 2004). Some employers perceive that, because the employees do not understand the terms of the NMW due to language barriers, they are not entitled to the same (Low Pay Commission, 2013).

Some data indicates that, among the vulnerable groups in the UK economy, the ethnic youth face the toughest chances from the policy (Low Pay Commission , 2007). For instance, employers are more critical in their hiring procedures and tend to reduce the level of employment. Instead, they focus on more qualitative hiring procedures that maximize efficiency and potentially reduce the hours of work for which they pay (Coats, 2004). In this regard, minority ethnic groups with lower qualifications reduce their chances of accessing job opportunities due to the high compensation that employers must offer (Card & Krueger, 2015).

Further, there is compelling evidence that indicates the possibility that the decline in the ethnic minority gap in wages and unemployment is unrelated to the NMW. According to the Low Pay Commission, the gap between the white communities and the ethnic minorities was already closing before the introduction of the National Minimum Wage (Low Pay Commission , 2007). This decline in the differential was attributed to shifts in education and choice of jobs, as well as a general decline in discriminative practices. Nevertheless, like the gender gap influence, the statistics on the influence of this phenomenon are inconclusive.

Assessing Historical Impact on Employment and Pay

Understanding the impact of the NMW on employment requires the presence of adequate theoretical background information on changes in employment. The elasticity of labour demand will be higher if there is an equally high elasticity of substitution (Tobin, 2010). In this case, if labour is highly substitutable for capital, then the labour demand is more elastic (Metcalf, 2006). Further, a higher elasticity of demand for the output also increases the elasticity of labour demand. Further, if the labour has a large portion of costs in the production process, a marginal increase will result in a high change in the cost of production (Metcalf, 2006).

Beginning 2003, little evidence indicated the potential of the NMW causing negative effects on employment (Coats, 2004). Nevertheless, the evidence has also been reluctant to conclusively indicate a positive impact of the policy on employment. Most of the statistics provided are given in periods over which the UK has been in relatively stable conditions. This is unlike other economies with similar policies, whose effectiveness has been tested over economic booms and slumps (Tobin, 2010). Some sectors in the economy, however, indicate a clear decline in employment following implementation of the policy. Residential care has recorded employers opting for the reduction of hours of work in order to maintain the same totals even with an increase in wages (Coats, 2004). This effect is also visible in other areas of the economy, especially those that employ high proportions of low income workers.

The NMW increases the hourly wage per employee, which is the most obvious benefit of its adoption in the UK (Coats, 2004). Employers are compelled to comply with this wage, implying that the staff will gain more income in the long run. This positive effect is based on the assumption that an increase in the hourly wage will result in a similar net increase due to the hours remaining constant (Card & Krueger, 2015). However, any variations in the number of hours available for work may result in a similar variation in the net income available to the employees (Card & Krueger, 2015). Notably, however, while employers may adopt this strategy, they often leave the overtime hours untouched (Low Pay Commission, 2013). The effect, therefore, may be expected to remain consistently positive.

However, compliance issues make it difficult to maintain the positive impact of increases in minimum wages among low income groups. For instance, Chinese workers in London restaurants and other portions of the hospitality sector experience peculiar tendencies in paid labour. The staff may work for more hours, but the employer reduces the number of recorded hours (Metcalf, 2006). With the staff comprising mostly of people with low professional and academic qualifications, their mobility is considered relatively low. Further, the workers in these occupations are rarely unionized (Coats, 2004). As such, there is little note of the lack of compliance and associated trends.

The National Minimum Wage also has the tendency to include insiders, while locking out the outsiders, who are the unemployed (Card & Krueger, 2015). With the increase in the cost of labour, employers are reluctant to recruit new staff with less experience. Notably, the groups most affected are the youth and the ethnic minorities, whose qualifications may be lower than the rest of the population (Card & Krueger, 2015). Critical reflection on the response of employers to arbitrary increases in wages feature the adaption of offshore production, or seeking cheaper production processes. The employers may also capital-intensive production processes, such as opting for self-service against staff services in supermarkets (Tobin, 2010).

Nevertheless, an argument in the contrary stipulates that the unemployed are compelled to seek better qualifications and move into better paying sections of the economy (Metcalf, 2006). The economically inactive groups also are more compelled to seek and retain their jobs due to the better incentive that the arrangement offers.

Conclusion

Understanding the history of the National Minimum Wage in the UK involves not only noting the developments in minimum wage numbers, but also the potential and actual effects on employment and wages. The impact of minimum wage differs for different groups, depending on their concentration in the low income and high income areas. Ethnic minorities and women occupy majority portions of the low income brackets. As such, implementing minimum wage policies is likely to concentrate on the lives of these groups. For the UK, the impact of the National Minimum Wage indicates inconclusive outcomes. The overall implication is that the wages per hour have continued increasing, but the working hours have decreased for some of the employees. Eventually, the net pay tends to decrease and thus present an insignificant change in income.

For women, the most affected group features the women working part-time. This group has experienced some increase in income, and effectively decreased the gender gap in wage in the UK by about 17% since 1998. However, the gap is still stubbornly wide for women in higher pay grades. Even more critically, other actions have supplemented this effort and thus, make it difficult to determine the degree of influence of the NMW. The life of the ethical minority is also affected by the implementation of the NMW. Here, most minority groups have closed the gap significantly, with the exception of the Bangladesh and Pakistani workers. However, these statistics are also in question due to previous data indicating that the gap was already closing prior to 1998.

Consequently, while the National Minimum Wage continues changing in the UK, its effects on the lives of people, especially in London, are largely unclear. The presence of multiple factors affecting lifestyles and the presence of multiple reactions from employers and employees to increases in the wages leaves this effect largely inconclusive.