Introducting a national minimum wage

In the 1990s, the Labour Party was considering how best to introduce a national minimum wage (NMW) to protect low-paid workers in the UK. Its strategy was to establish a non-partisan Low Pay Commission, with representatives from employers, employees and universities. Labour introduced minimum wage legislation in 1998, a year after its decisive election victory, and the NMW is now an established part of British economic and political life.

The challenge

The reduction in trade unions’ influence by the Thatcher governments of the 1980s, during a period of very high unemployment, gave employers greater bargaining power in negotiating wage settlements. The upshot was that by the by the 1990s, “when most of the last wages councils were abolished, pay for many workers in a number of sectors was well below what was considered to be a living wage”. [1]

The initiative

The commitment to introduce a national minimum wage was included in the Labour Party's 1992 manifesto, but it was “a source of vulnerability rather than a winning policy”. [2] However, academics began to challenge the idea that a minimum wage would destroy jobs. Labour adopted this view and shifted the focus away from setting an actual amount for the minimum wage towards establishing it as an ethical principle.

Labour’s 1997 election manifesto included the following promise: “A sensibly set national minimum wage: There should be a statutory level beneath which pay should not fall – with the minimum wage decided ... according to the economic circumstances of the time and with the advice of an independent low pay commission, whose membership will include representatives of employers, including small business, and employees. ... Introduced sensibly, the minimum wage will remove the worst excesses of low pay (and be of particular benefit to women), while cutting some of the massive £4 billion benefits bill by which the taxpayer subsidises companies that pay very low wages.” [3]

Labour was elected with a large majority in May 1997, and in July of that year the government set up the Low Pay Commission (LPC) with a remit to advise on the rate of the National Minimum Wage (NMW). In November, the NMW bill was given its first reading in Parliament. The National Minimum Wage Act came into force on 31 July 1998. It was the first time that such legislation had been introduced in the UK.

It was set at GBP3.60, with a reduced rate for workers aged 18 to21 of GBP3.00, and without a minimum wage for those aged 16 to 17. Since then there have been a number of adjustments to the rates, as well as an introduction of the new 16 to 17 year old rate in October 2004 and a separate apprentice rate in October 2010.

The long-term aim of the NMW is to remove the problem of poverty pay, which exists when the earnings from paid work do not result in a living wage and fail to push people out of poverty.

The public impact

The national minimum wage made a significant impact at the bottom of the income scale – particularly to women, who comprised 70 percent of the beneficiaries and were not covered by existing collective bargaining agreements. There were a million beneficiaries in all.

The rates as of 1 April 2016 are:

  • “Aged 25 and above (national living wage rate) – £7.20 [4]
  • Aged 21 to 24 inclusive – £6.70
  • Aged 18 to 20 inclusive – £5.30
  • Aged under 18 (but above compulsory school leaving age) – £3.87
  • Apprentices aged under 19 – £3.30
  • Apprentices aged 19 and over, in the first year of their apprenticeship – £3.30.”

What did and didn't work

All cases in our Public Impact Observatory have been evaluated for performance against the elements of our Public Impact Fundamentals.

Legitimacy

Public Confidence Fair

The Labour Party had been elected with 418 seats and a majority over the Conservatives of 253 seats. This indicated public confidence in the government, which it retained in 2001.

There was great public support for the NMW from the TUC and some resistance from some business leaders and the Conservative Party, but over time it has become a publicly accepted part of the UK’s economic framework.

Stakeholder Engagement Strong

The key internal stakeholders were the government and the LPC. “Before the 1997 general election, the decision was made to have [an LPC] with three employer representatives, three labour representatives and three independents.” In the words of Geoffrey Norris, then a special adviser to the No. 10 Policy Unit, having a non-partisan LPC was ‘“critical in getting the CBI on board. Norris commented ... that the social partnership model and ‘the fact that ... the TUC and CBI were signing off has helped the LPC and the minimum wage have very, very deep roots in British’.”

There was as a result significant support for the policy from the key external stakeholders – the Confederation of British Industry (CBI), the representatives of the employers, and the Trades Union Congress (TUC), the representatives of the employees. Other agencies were involved, such as the Federation of Small Business and Citizens Advice (as it is now).

Political Commitment Good

The Labour party was strongly in favour of the NMW and had been committed to it for a long time, and it had appeared in two election manifestoes. “Ministers at the Department of Trade and Industry also played a very significant role in driving through the initial proposals and then protecting the integrity of the [LPC]’s proposals, not least preventing too much interference by their colleagues.” [5]

Although the Conservatives were against the introduction of the minimum wage, claiming that it would destroy jobs and reduce economic competitiveness, their small number of seats in the House of Commons meant that they were not in a position to resist it. As stated above (in Stakeholder engagement), the relative impartiality of the LPC enabled the government to persuade the CBI to participate, which was very significant.

By the time the Labour Party left government, in 2010, “the machinery for setting the minimum wage established in the early years of the Labour government survived a change of government and came top of our poll of political studies academics for best policy of the last 30 years”. [6]

Policy

Clear Objectives Good

The objectives of the NMW were simple and they were clearly set out in the Labour manifesto as “a statutory level beneath which pay should not fall” and in the subsequent bill and statute. This enabled it to be effectively monitored and enforced by Her Majesty’s Revenue and Customs (HMRC).

Evidence Strong

Policymakers drew their evidence from the following sources:

  • The work of David Card and Alan B. Krueger in the US, which analysed the effect of the abolition of wage councils and concluded that they had not reduced employment.
  • Examples in other countries, such as Germany and the Netherlands and those named by Labour in its manifesto. “Every modern industrial country has a minimum wage, including the US and Japan. Britain used to have minimum wages through the Wages Councils.” [7]
  • The LPC’s first report served as pilot study. “The Commission’s first report was the product of a huge research effort. The LPC received 580 evidence submissions, met with or visited 233 different interested parties all over the UK and listed references for more than 350 pieces of literature which informed their report.” [8]

Feasibility Fair

As this was the first minimum wage act passed in the UK, there were doubts over whether the scheme would have a positive impact and whether employers would abide by the law. However, other Anglophone countries had implemented similar labour laws, with the US introducing a minimum wage in 1938 and New Zealand its Minimum Wage Act 1983.

Action

Management Strong

The preparation for the NMW legislation was well managed by Labour in setting up a non-partisan LPC, an authoritative body that examined and formulated the detail of how the policy should be implemented. There were several skilled managers and officials in the LPC to implement the policy, representing the CBI, other business organisations, the TUC and academic specialists. The DTI also ensured that the legislation progressed smoothly and it was enforced forcefully by HMRC.

Measurement Good

The relevant indicators were clearly defined and easily measurable (and therefore enforceable). The minimum wage itself was defined in the legislation, with variations for different age groups. Other factors such as the number of hours worked and the number of employees enrolled for NMW were incorporated in the delivery of the policy and through these indicators the impact of the policy were monitored consistently.

The evidence on the extent of non-compliance comes from data on complaints received, for example by unions or Citizens Advice Bureaux, and the enforcement efforts of HMRC.

Alignment Strong

The Labour Party had prepared the ground for a cooperative approach to defining the NMW well before it achieved power in 1997. The idea of the LPC was defined before the election and was put into place soon afterwards. The composition of the LPC and the social partnership that it created was a major factor in enabling a cooperative approach between often opposed factions, i.e., the employers’ organisations and the TUC.