Evidence to the Low Pay Commission
1. Background to the Foundation's interest
The Joseph Rowntree Foundation (JRF) is an independent, non-political body which funds programmes of research and innovative development in the fields of housing, social care and social policy. It supports projects of potential value to policy-makers, decision-takers and practitioners.
A considerable body of JRF's research work, both completed and ongoing, is of direct relevance to the interests of the Low Pay Commission. In particular the Foundation's current Work and Opportunity Programme, and its 1993-95 Inquiry into Income and Wealth, have produced a considerable body of salient evidence.
This work is carried out by researchers in academic and other institutions, funded by JRF. In some cases the researchers and their organisations may have made their own submissions to the Commission. However, the Foundation is able to bring together the results of a wide range of projects that it supports, and to synthesise their findings. The present submission is therefore a summary rather than a detailed account of the evidence. For each of the projects mentioned, a concise four-page "Findings" briefing is attached where possible - one of these in draft. The Foundation would be happy to provide at the Commission's request more in-depth information on any of the projects - including those that are currently unpublished.
2. Summary of low pay issues of interest to the Foundation
The two most important questions for the Foundation concerning the minimum wage are:
a) What effect will the NMW have on family poverty, and on living standards generally in households with one or more workers in low-paid employment;
b) How will the NMW interact with benefit payments to affect incomes and incentives?
To help consider these questions, JRF evidence is presented in section 5 below, on:
- What might be considered an adequate minimum income in the late 1990s, including evidence on how other countries go about defining income adequacy;
- Existing overall patterns of income distribution and some of the influences on the relative earnings of the lowest paid workers;
- Patterns of work within households that determine the effect of hourly wage rates on household earnings;
- Relationships between low pay and benefits, for those moving in and out of work;
- A calculation of what effect the NMW might have on household poverty under various conditions.
The Commission's terms of reference lay particular stress on the impact of the minimum wage on competitiveness and employment levels. But they also mention the "wider...social implications". The effect of the NMW on its intended beneficiaries needs to be well understood. The JRF's evidence shows that to eliminate hardship in families that at present include low-paid workers, using the minimum wage alone, it would be necessary to set a NMW considerably above that which is likely to be considered economically or politically feasible in the foreseeable future. One implication is that the NMW cannot be seen in isolation from other policies including those concerning taxation and benefits. But further, in developing a compromise between a NMW level that is affordable to employers and a level that promotes adequate living standards among the working poor, the Commission may well wish to draw attention to the gap between the two, rather than treating the unattainable as irrelevant.
Future decisions about minimum wage levels could thus take as reference points not just that which is today considered acceptable, but also the level considered desirable in terms of income adequacy. It could be particularly valuable for the LPC to establish this second reference point given the uncertainty of the evidence on which the first is based. Until the NMW is in place, its effect at any given rate on employment levels is to a large extent a matter for speculation. A cautious starting rate should not necessarily become a norm, and an expression of a "socially" desirable level could be helpful in guiding any future decisions to raise the rate, where prudence allowed.
3. Expected economic impact
Although most JRF work is not on subjects that would shed light on the expected impact of the NMW on employment and company behaviour, the LPC should be aware of one highly relevant project currently in progress on Recruitment and retention in low paying labour markets. Undertaken by Paul Gregg at the London School of Economics, it is focusing on the relationship between low pay, recruitment and labour turnover. The study is exploring the possibility that increased labour costs resulting from the NMW may be partially offset by the benefits of more effectively targeted recruitment, or by lower recruitment costs because of improved retention rates. Evidence from this study will start to emerge concurrently with the LPC's deliberations, and can be obtained by direct contact with the author.
4. [LPC category not applicable]
5. Main JRF Findings of relevance to the Commission
a) Income adequacy
Any minimum wage is intended in some respect to improve the living conditions of low-paid workers. Whether its stated objective is to outlaw only the most extreme cases of "exploitative" or inequitable pay rates, to combat "social exclusion" or to address poverty or income inequality more widely, it is relevant to know what given levels of remuneration mean for families, in terms of their ability to afford basic items needed to function in modern society. (Although it is sometimes argued that the rationale for a minimum wage is mainly about "fair pay for the job" rather than adequate incomes, to ignore the latter entirely would beg the question of why the government only wishes to intervene in market-determined remuneration at the bottom end of the wage scale.)
Unlike many other countries, the UK has not systematically tried to formulate what constitutes a minimum living standard. But research supported by JRF has produced some valuable indicators. Notably:
Research on Household budgets and living standards (1992) by the Family Budget Unit calculated the net income needed to buy what are generally considered the necessities of life. This research, conducted in the early 1990s but still relevant, calculated what would be needed to attain given standards of living, labelled "modest but adequate" and "low cost". The latter included only items that at least two-thirds of the population described as necessities or which at least three-quarters of the population had. On this basis, it was calculated that two adults with two children would need £141 net, and a lone mother with two children would require £111 net, in both cases in April 1992 prices. (In October 1997 prices, this equates to £162 and £128 respectively.)
A survey of evidence of Life on a low income (1996) by Elaine Kempson of the Policy Studies Institute drew on 31 studies to look at what life was like for the one in four British people in homes with less than half the average disposable income. A key finding was that for most people on low incomes, a little more would go a long way towards meeting basic needs and avoiding financial difficulties. On net incomes of £165-85, families with children had a 50 per cent chance of getting into arrears with basic bills, with the probability rising steeply as income fell; on £100 a week families were virtually certain either to be behind with their bills or to be going without food and other essentials to pay bills.
This survey identified qualitative evidence to suggest that a minimum wage of £4.75 an hour would be required to give incomes close to the amounts needed to cover outgoings and avoid financial difficulties. However, it urged that this high figure should be treated with caution, since minimum wages need to be seen in conjunction with other policies including tax and benefit regimes when calculating the effect on families. Another formulation of adequate incomes emerging from this research was the estimate that unemployed people need about £20-£30 additional net weekly income to relieve the worries and deprivations that characterise their lives. This implies net weekly income of:
- £150 for single householders
- £175 for childless couples
- £180 for a lone parent with two children
- £200 for couples with two or three children.A survey on Expenditure on children (1997) by the Centre for Research in Social Policy, Loughborough University found that one in ten children go without three or more things regarded as necessities because their parents cannot afford them, but that more often, parents go without things to provide for their children. The cost of raising children greatly exceeds the extra amount provided for them through the benefit system. Child Benefit provides approximately one fifth of average spending on a child. For working parents claiming Family Credit, the "earnings disregard" for childcare costs was, according to this study, not enough to offset spending on childcare. However, the study was carried out before the increase in the maximum level of this disregard, from £60 to £100 of weekly income for families with two or more children, announced in the July 1997 Budget.
In a study to be published in January 1998 on Setting adequacy standards, John Veit-Wilson of the University of Newcastle reviews how ten other countries go about defining minimum income in order to set minimum wages, pensions or income support. There is no single prevailing method, and the definition of adequacy is as much a result of political outlook as of social science methodology. For example Nordic countries consider social equality to be important and aim to limit how far levels of living fall below the average; some other European countries express poverty rather in terms of exclusion from one's right position in highly unequal societies; in the United States, it is seen rather as lack of money to meet minimum needs.
An important finding from this research is that all these ten countries feel able to define explicitly what they regard as an adequate minimum living standard without making a political commitment instantly to bring every household's income up to this level. The gap between the desirable and the attainable is acknowledged in practice, yet there is an aspiration to maintain defined minimum living standards.
b) The existing distribution
The Joseph Rowntree Foundation has described in detail the way in which income and wealth is distributed in the UK in the 1990s, and how this distribution has changed over the years. Its Inquiry into Income and Wealth, carried out with a prominent team including the then Director General of the CBI and General Secretary of the TUC, reported on these matters in 1995. The figures are presently being updated, and a new report will be available early in 1998.
Volume 2 of the Inquiry, a summary of the evidence compiled by John Hills at the London School of Economics, makes it clear that an important although by no means the only cause of growing income inequality over the past two decades is a widening dispersion of wages. This is particularly striking given the long-term stability of overall relative pay for at least a century up to the late 1970s. For example, the ratio of pay at the bottom decile to median pay, for men in manual jobs, fluctuated between 67% and 71% from 1886 to 1978, but had fallen below 63% by 1993. (In 1997 it was 62.4%.) This change is attributable partly to increasing wage premia for better educational qualifications and longer experience in the workforce, but has also been influenced by the declining importance of Wages Councils and trade unions.
For young people, these widening inequalities are greater than for the population as a whole. The inquiry reported:
That the differential between overall youth and adult wages has increased - for example 21-24 year old men had mean earnings of 78% of the adult male median in 1993 compared to 87% in 1979.
That there is growing inequality among young people themselves attributable in large part to differences in qualifications; for example, earnings of the top decile of 21-24 year old males was 2.5 times that at the bottom decile by 1993 compared to 2.1 times in 1979.
That the lowest-earning young people had less prospect than in the past of increasing their earnings with age. Indeed, looking at the most recent cohort of young labour market entrants, the average pay among lowest-paid group had not risen at all with age.
These findings support the view that qualifications are a key route out of low pay, but also show that for young people without qualifications, very low pay is not necessarily just a temporary situation to be endured while they gain experience.
c) Household work patterns
Discussion of the adequacy of a minimum wage is sometimes based on the assumption of a sole male breadwinner supporting a traditional family. In countries such as France, the rationale of the minimum wage is underpinned by the notion of a "family wage" in this sense. But in Britain as in other countries only a small minority of households fit the traditional type: about one person in ten now lives in a household with a male breadwinner, a non-working mother and at least one dependent child. So the relationship between wage levels and family income is bound to be a complex one.
The evidence from several JRF-funded studies shows that households that include low paid workers are typically dependent on a combination of male earnings, female earnings and benefits to make ends meet. On the one hand this evidence weakens the case for setting minimum wages at a level designed to provide an acceptable living standard for a sole earner to support a family by working 40 hours a week. But conversely, it demonstrates that low-wage earnings, whether by males or females, often play a crucial role in family budgets. The idea of women's income from low-paid jobs as being supplementary to the main male wage is increasingly out of date.
Specifically:
A study on Combining work and welfare (1997), by Jane Millar, Steven Webb and Martin Kemp, calculated the extent to which moving from unemployment into a relatively low-paid job could bring a household out of poverty. It looked at low-earning individuals (with less than two-thirds the median hourly wage) and examined whether and how their household income was raised above a poverty threshold defined as half the national average.
In only 8% of cases were the low-paid individual's earnings sufficient on their own to bring the household income above this threshold. In a further 40% of cases, when these earnings were combined with that of a spouse, the poverty threshold was exceeded. Social security benefits brought a further 8% of households out of poverty, and the income of others in the household - particularly parents of low-earning young people living at home - a further 31%. The remaining 12% of people with low pay were unable to escape household poverty - a big rise from the 1970s and early 1980s when only 3-4% of low-paid workers lived in families with below half average income.
This analysis shows that a significant but falling proportion of low-paid workers are young people living with their parents: reliance on household members other than a spouse has fallen from around 50% to around 30% of low-paid workers since the late 1960s. It also shows that 1.5 million people with low pay (about a third of the total) are married women whose husbands are employed, and that in 90% of these cases the husband's earnings raise family income above the poverty threshold. But another third of low-paid people are men, and the ½ million of them who are married have become far more dependent than in the past on the incomes of their wives. In the late 1960s, nearly half of low-paid married men escaped poverty through their own pay alone, and only about 15% with the help of their wives' earnings; by 1994, just under a third of these men had wages sufficient on their own to exceed the poverty threshold, but just over a third had wives whose earnings combined with their husbands' brought family income above this level.
Work for JRF's Inquiry into income and wealth (see above) shows that women's economic role has been growing particularly quickly in households with low income from work. In 1980 women were much more likely to be employed if they lived in families with higher than average incomes, but by 1990 the gap with women in lower income families (except in the bottom tenth) had narrowed greatly - for example in families in the third income decile group, the proportion of women who were employed had risen from just over 40% to nearly 70%. At the same time, the contribution of women's earnings to household income rose sharply in families with lower-earning men, to between one-fifth and one-quarter. (These comparisons also show a contrast between what has happened to women's economic roles in households with low male earners and in those with men not working: in the latter, females' share of earnings has steeply declined.)
A forthcoming report on Low income and social exclusion in rural Britain (1998) from the Arkleton Centre for Rural Development Research, University of Aberdeen, finds that in rural areas, where low pay has been found to be more persistent, low-paid workers may frequently have to hold several jobs and work long hours in order to earn an acceptable household income.
Further studies of men's and women's roles across income groups paint a complex picture:
A study of Fathers and fatherhood in Britain (1997) by the Family Policy Studies Centre found that although fathers still predominantly earn more than and work longer hours than mothers, "breadwinning" is no longer their sole preserve. A fall in the relative pay of young fathers in their first jobs has helped reduce opportunities to support families that were available to young men 20 years ago. The single most common working pattern for married couples with dependent children is two earners with the wife working part time (40%), and the two-earner family with the wife working full time (22%) is almost as common as the husband only working (26%).
A report on financial independence for women born in 1958 (1995) based on an analysis of National Child Development Study data by a team from City University found that 78% of 33-year-old women living with a man contribute substantially less than their partner to joint income, but that nevertheless 96% of those working full time and 55% of those working part time earn at least a "survival" income in their own right.
A comparison of Lone mothers and work (1996) in 20 countries by the Social Policy Research Unit, University of York found that UK lone mothers are less likely to be in employment than those in many other industrialised countries. The relative pay of lone mothers is about average in the UK, but the big disincentive is the high level of childcare costs.
d) Work, welfare and movement in and out of low pay
People who would benefit from the minimum wage are also typically people who benefit from the welfare system, both when working and during periods of unemployment. The effects of the minimum wage need therefore to be considered in close conjunction with the effects of benefits, and of movements in and out of low pay.
First, periods of low pay are frequently interspersed with periods of unemployment:
A study of Movements in and out of low pay (1997) by the Institute for Fiscal Studies found considerable mobility of this type, so that even though at any one time 7% of employed men and 28% of employed women would be affected by a NMW of half male median earnings, 12.5% of men and 42% of women employed at some point between 1991 and 1994 would have been affected by it for at least part of this period. This mobility was more likely to lead in and out of employment than between high and low pay. Of employees in the bottom quarter of the earnings distribution in 1991, 13% of men and 22% of the women were out of work in 1994, compared to just 6% and 10% respectively who were among the top half of earners.
The above-mentioned study on Low income and social exclusion in rural Britain finds that the low-paid people in rural areas are less likely to become unemployed, but also slightly more likely to remain low-paid than people in non-rural areas. Looking in this case at men earning below two-thirds the median wage, it found that 68% of rural and 65% of non-rural people were still in such low-paid jobs the following year.
Since people frequently move between unemployment and low-paid jobs, pay rates can have an important effect on work incentives. The study on Life on a low income referred to above found a reluctance of some unemployed people to consider jobs on what they considered "joke" wages. However, for those with dependants, the availability of in-work benefits often makes it worth taking low-paid jobs, although hard thereafter to escape low family income:
The study on Combining work and welfare (cited above), reviewing other studies, reports that family credit does succeed in its objective of making people better off in work than out of it - by a weekly average of £30 (in 1991) for lone parents and £18 for couples. However, it also found that people's behaviour was more influenced by the labour market than by the benefit system, about which their knowledge was often patchy. Moreover, while family credit helps boost income when people first get into work, it appears to do little to improve their long-term earnings capacity or to lift them out of poverty. Some 20 per cent of family credit recipients were found in 1993 to be in severe hardship, compared with 28 per cent of non-working families.
For lone mothers in particular, family credit seems to "trap" workers in a semi-permanent state of low income. A study on Lone mothers, employment and well-being (1997) by the Policy Studies Institute found that although in-work benefits raise the employment chances of lone mothers, they do so by encouraging or facilitating entry to lower-paid jobs. Lone mothers receiving family credit supplements have weekly earnings about one quarter lower than they would expect given their age, qualifications and experience, and once they enter such jobs the rate at which they progress to higher pay is very slow.
The Foundation has also been exploring the ways in which greater integration of the tax and benefit systems for working families with children might help people to be better off in low-paid work without being subjected to the social stigma associated with claiming benefits. One issue is whether the benefit of some form of low-income tax credit would be "captured" by employers paying lower wages. It is hard to measure in practice whether this has been the case in other countries where such schemes operate; in the United States, the existence of a minimum wage appears to limit such behaviour, but it cannot be guaranteed to prevent it. Further discussion of these issues is available in The Integration of taxes and benefits for working families with children (1997), a report by Pamela Meadows, Director of the Policy Studies Institute.
A forthcoming study on the distribution of income within families by Ruth Lister, University of Loughborough finds that income in low-income households is more likely to be managed by women than by men. One result is that Family Credit and Child Benefit, which are paid to mothers, are viewed more favourably than a tax credit that may be appear in a male pay packet. Nevertheless, this study confirms that means-tested benefits are not seen by either men or women as a satisfactory substitute for adequate wages.
e) A projection of the impact of the NMW on households
The above-mentioned study on Combining work with welfare simulates the effect of various reforms on poverty, work incentives and the Exchequer.
It predicts that the introduction of a NMW of £3.75 per hour would reduce by around 270,000 the 10.9 million people living in households with incomes below half the national average. It would not have significant effects on work incentives in terms of changing the marginal tax rates of those whom it affected, but would improve the incentive for some people to be in work rather than unemployed, in particular for presently unwaged women, an extra 200,000 of whom could potentially improve their family situation by at least 25% by taking part-time work. The effect on the Exchequer is hard to calculate, but likely to be positive. Over £1 billion could be yielded from extra income taxes and national insurance contributions and from lower means-tested benefits. But this might be offset significantly by even a small negative effect on employment, by higher wage costs to the public sector as an employer, or by potential reductions in certain taxes such as corporation tax if profits are affected.
The study concludes that on its own, the minimum wage can only go part of the way to tackling some of the problems faced by people presently on low pay. It therefore suggests that it should be combined with other reforms including changes to family credit, and a lowering of rents in social housing, partly financed by the projected exchequer gains from the introduction of the NMW. The package suggested would more than double the number of families whose household income would rise above half the national average, and reduce by half the number of unwaged family men for whom even a full-time job adds no more than 25 per cent to their out-of-work income.
Along with the other evidence cited in this submission, this evidence shows that the NMW can indeed make an important difference to the household income of low-paid workers and to the incentive to take jobs - but that its impact cannot be considered in isolation from reforms to the welfare system. This is not however a valid reason to rely entirely on benefits to prevent working poverty, as market income remains the most powerful work incentive. Also, an over-dependence on means-tested benefits could encourage employers to pay less to those who qualify. Securing better rates of pay for those currently earning the lowest wages can help greatly in efforts to reduce welfare dependency. It can also make less chronic the relentless financial hardship of those trapped in a pattern of low-paid work interspersed with periods of unemployment.
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Summary of main findings
Families relying on low pay tend to get into financial difficulties or go without basic necessities, particularly if they have children.
Many other countries define the minimum incomes needed to reach an adequate living standard, in order to inform but not to bind decisions about benefits and minimum wages.
Widening inequality of earnings in the past two decades have contributed to widening dispersion of incomes. The growing importance of qualifications explains some but not all of this trend.
Men and women on low pay each make an important contribution to family income; it is becoming harder to escape poverty through the earnings of one low-paid worker.
Movement between low pay and unemployment is common.
In-work benefits for low-paid families in work help to boost their income when they first gain employment, but does little to improve their long-term earning capacity or lift them out of poverty.
A national minimum wage on its own would only do a small amount to reduce poverty, but in combination with changes to the benefit system, the effect could be considerable.