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IEA releases report on reform of the minimum wage

A new report from the Institute of Economic Affairs calls for an overhaul of UK’s minimum wage rate structure, by adjusting to just one or two rates for all workers aged 18 and over.

The UK currently has five different age-related minimum hourly wage rates – more than almost any other country – and, if adopted, the Taylor Review suggestions would bring this up to nine. This structure is over-complicated and increasingly politicised; the rules are difficult to understand and apply, leading to compliance problems and an increased use of resources devoted to enforcement.

HMRC now has an annual budget of £25 million for the purpose of minimum wage rule enforcement, but while there are one-off examples of egregious behaviour, much underpayment seems to be the result of small businesses – with no prior experience or legal expertise – not understanding the complicated rules.

The UK has now had a National Minimum Wage (NMW) for nearly twenty years, and changes to the policy, such as the implementation of the National Living Wage (NLW) in 2015, together with court and tribunal decisions, have added increased administrative burdens. Today’s IEA report argues that it’s time to refresh minimum wage policy to make it work for employment trends in 2018.

How to simplify the rate structure:

Simplify the NMW structure by having two rates for workers aged 18 and over, with a possible phasing-in period for 18-20 year-old workers:

• In the longer term, considering having only one minimum wage set for adult workers.​

Scrap the lowest minimum wage rate

• A rate for under-18s is even less necessary today than it was when first implemented. When the 16-17 age rate was introduced in 2004, nearly 30 per cent of this age group was in full-time work. Today, only 17 per cent of this age group are in full-time work; the figure falls to 7 per cent when apprentices are excluded.
• Simplifying the minimum wage structure would help meet the government’s objective of having all under 18s in education or training.

Reject the Taylor review proposal to introduce higher hourly minimum rates for zero-hours contracts (ZHC)

• A higher rate for ZHC workers is likely to create resentment amongst fixed-hour workers, many of whom work the same (or fewer) hours.
• It would perversely discourage ZHC workers from taking fixed-hours contracts.
• Requiring a higher hourly rate would make employers less likely to offer ZHCs, closing off opportunities for a significant number of workers who benefit from the flexibility of non-fixed contracts.

Scrap the apprentice rate

• Many apprentices are already paid well above the minimum rate and earnings of apprentices have been rising faster than low paid groups for some time.
• Rules need to ensure young people are not employed simply as cheap labour, but are given a genuine learning experience; however, this does not require a special rate for apprentices.

Devolve wage rates to the nations of the UK, and possibly to London

• The Low Pay Commission (LPC) has always had to balance the minimum wage rate based on impacts and risks to jobs to different regions. While the ratio of the NLW to median hourly earnings was 45 per cent in London in 2017, this amounted to 67 per cent in the East Midlands.
• Increased devolution over the past fifteen years makes this an attractive option.
• If devolution occurs, rename rates to reflect region (i.e. Scottish Minimum Wage, London Minimum Wage, etc.)

How to improve minimum wage compliance in the future:

Empower the Low Pay Commission

• The LPC has a very good record for suggesting sensible policies and carrying out high-quality research on the impact of the minimum wage to jobs and the economy.
• Once the 2020 target rate for the NLW is reached, full autonomy should be restored to the LPC to set recommended rates according to its original remit of raising wage rates only if this does not risk significant employment loss.
• This would be a step in the right direction of depoliticising minimum wage-setting policy.

Enforce proportional punishment for rule-breakers

• Rather than HMRC seeking out non-compliance with minimum wage rules, employees should be incentivised to make their own claims by making fines payable as compensation to underpaid workers.
• The practice of ‘naming and shaming’ organisations which have breached the law should be reviewed.
• Name and location details should only be published where the breach of rules was unequivocally deliberate, through culpable ignorance, or for repeat offences.

Commenting on the report, Professor Len Shackleton, Editorial Research Fellow at the Institute of Economic Affairs said:

“The labour market has changed greatly in the last twenty years and the structure of the minimum wage system needs to change to reflect this. Rules should be simplified and clarified so that both employers and employees fully understand entitlements.”

Notes to editors:

For media enquiries please contact Nerissa Chesterfield, Communications Officer:nchesterfield@iea.org.uk 07791 390 268

To download the IEA’s “Restructuring Minimum Wages” please click here

For more research from the IEA on the minimum wage, click here.

The mission of the Institute of Economic Affairs is to improve understanding of the fundamental institutions of a free society by analysing and expounding the role of markets in solving economic and social problems and seeks to provide analysis in order to improve the public understanding of economics.

The IEA is a registered educational charity and independent of all political parties.