Academic journal article National Institute Economic Review

Still Evidence-Based? the Role of Policy Evaluation in Recession and Beyond: The Case of the National Minimum Wage

Academic journal article National Institute Economic Review

Still Evidence-Based? the Role of Policy Evaluation in Recession and Beyond: The Case of the National Minimum Wage

Article excerpt

This article explains the role of evidence in determining the recommendations made by the Low Pay Commission (LPC) for the National Minimum Wage (NMW). First, it sets out the process of recommending the minimum wage including the role of evidence. Second, it summarises the evidence available on the impact of the minimum wage before discussing how that evidence has informed the recommendations for the adult rate of the minimum wage in the LPC's reports. It concludes by assessing the extent to which the NMW might be regarded as a success and considers whether the recent financial crisis will alter the evidence-based approach so far adopted by the LPC.

Keywords: Minimum wages; wage level and structure; wage distribution; evaluation

JEL Classifications: J31; J38

Introduction

Throughout the 19th century, various governments intervened in the labour market by setting certain minimum standards for conditions of employment, especially governing the hours worked by women and children, but these did not cover wages apart from the Fair Wages Resolution of 1891 that governed central government contracts.

It was not until the 20th century that intervention in wages extended to the private sector. The Trade Boards Act 1909 established Wages Boards that could set legally enforceable minimum wages in four 'sweated industries'. The President of the Board of Trade, Winston Churchill (1906), argued that "where you have what we call sweated trades, you have no organisation, no parity of bargaining, the good employer is undercut by the bad and the bad by the worst" and concluded that "where these conditions prevail you have not a condition of progress, but a condition of progressive degeneration". Over time these Wages Boards were extended to other sectors. They were renamed Wages Councils in 1948 and at their peak covered 66 sectors. Their provisions were also extended to cover leave entitlement, holiday pay, rates for different grades and other terms of employment. In the 1980s and 1990s the Conservative Governments dismantled these minimum wage standards by rescinding the Fair Wages Resolution in 1983, reducing the powers of Wages Councils in 1986 and abolishing them in 1993. This brought statutory wage legislation in the UK to an end, except in agriculture, where the three Wages Boards (for England and Wales, Scotland, and Northern Ireland) survived.

In some ways, this dismantling of minimum wage standards provided an impetus to a national minimum wage. Together with trade union decline, the increased use of outsourcing and subcontracting of services, and intensified globalisation, the abolition of the Wages Councils contributed to increasing wage inequality in the 1980s and 1990s. Child poverty increased sharply after 1983 and the use of in-work benefits (topping up low pay to meet a minimum income level) was becoming more expensive to the Exchequer. In addition, political momentum was provided by the trade union movement (finally agreeing a national minimum wage policy in 1986), the Labour Party (including a national minimum wage commitment in its 1992 manifesto), the Liberal Democrats (adopting a statutory regional minimum wage in its 1997 manifesto) and various lobby groups, led notably by the Low Pay Unit.

National Minimum Wage

In 1997, Labour was elected and introduced the NMW. It was to be a wage floor set at a level intended to prevent exploitation. It was not intended to be a 'living wage'. As part of a three way strategy to 'make work pay', it should be considered alongside taxation and the benefit system. The tax system was changed to provide greater incentives to work by substantially increasing in-work tax credits, particularly for those with children. In addition, eligibility criteria in the benefit system were tightened and some provisions made less generous. The NMW is a national hourly rate and, as laid out in the National Minimum Wage Act of 1998, it cannot vary by region, industry, occupation or size of workplace. …

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