UNISON evidence to the Low Pay Commission on minimum wage rates for 2019
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UNISON evidence to the Low Pay Commission
on minimum wage rates for 2019
June 2018
CONTENTS
INTRODUCTION ....................................................................................................................................... 3
1. SUMMARY OF RECOMMENDATIONS.............................................................................................. 4
2. EXECUTIVE SUMMARY .................................................................................................................... 6
3 GENERAL ECONOMIC CONTEXT .................................................................................................... 13
3.1 Economic growth ....................................................................................................................... 13
3.2 Unemployment and turnover rates ........................................................................................... 14
3.3 The cost of living ........................................................................................................................ 15
3.4 Pay settlement and average earnings ........................................................................................ 18
3.5 Operating surpluses ................................................................................................................... 19
4. FACTORS AFFECTING LOW INCOME GROUPS .................................................................................. 21
4.1 Scale of low pay in the UK .......................................................................................................... 21
4.2 Employment, vacancy and profit rates in low-pay sectors ........................................................ 24
4.3 Spread of the Living Wage and contrast to NMW ..................................................................... 26
4.4 Impact of tax and benefit changes ............................................................................................. 28
5. FACTORS AFFECTING PUBLIC SERVICE WORKERS ............................................................................ 33
5.1 Broad pattern of low pay in public services ............................................................................... 33
5.2 Low pay by sector ...................................................................................................................... 34
6. FACTORS AFFECTING YOUNG WORKERS AND APPRENTICES ........................................................... 40
6.1 Injustice of youth rates recognised by most employers ............................................................ 40
6.2 Employment and wage rates among young workers ................................................................ 41
6.3 Impact of inflation on value of youth rates ............................................................................... 43
6.5 Apprentice rate risks .................................................................................................................. 48
6.7 Undermining of the “national living wage” ............................................................................... 52
7. WIDER ECONOMIC FACTORS ........................................................................................................... 54
7.1 Comparison of NMW growth to high income groups ................................................................ 54
7.2 Flaws in minimum wage “bite” as indicator of affordability ..................................................... 54
7.3 Macroeconomic employment impact ........................................................................................ 57
7.4 Tax changes for employers ........................................................................................................ 59
8. ENFORCEMENT OF THE NATIONAL MINIMUM WAGE.................................................................... 61
8.1 Naming and Shaming ................................................................................................................. 61
8.2 Sleep-in shift back payments ..................................................................................................... 62
8.3 Payslip changes .......................................................................................................................... 64
8.4 Problems with payslip records ................................................................................................... 66
8.5 Other suggested actions ............................................................................................................ 67
APPENDIX 1 – Employment growth rates by occupation ..................................................................... 70
APPENDIX 2 - Example scenario for conversion ................................................................................... 91
2INTRODUCTION
As one of the largest trade unions in the UK, UNISON represents in excess of 1.3 million
members working across the public services. Our members are employed directly by public
sector organisations, by private contractors and community / voluntary organisations
engaged in providing public services, and by utility companies.
UNISON represents workers in local government, the health service, social care, schools,
universities, further education and sixth form colleges, police and probation services, water
and energy companies, environment agencies and transport.
With such a large and wide-ranging set of employees amongst our membership, two-thirds
of whom are women, we are well placed to comment on the experiences of workers at the
sharp end of low pay.
The evidence that we present in this document sets out our key recommendation for the
commission to consider and an executive summary of our analysis. Subsequent chapters go
on to consider in greater detail the economic context for increases in the National Minimum
Wage, the latest trends affecting low-paid workers, the specific experience of our members
in the public services and the enforcement issues in application of the National Minimum
Wage.
31. SUMMARY OF RECOMMENDATIONS
UNISON believes that the ultimate goal for National Minimum Wage policy in the UK should
be as follows:
The National Minimum Wage should be raised to the level of the UK Living Wage
announced annually by the Living Wage Foundation and move toward a target of £10
an hour.
National Minimum Wage rates should be harmonised into a single rate across all age
groups
In moving toward these targets, UNISON believes that the following recommendations
should be carried through:
The ―national living wage‖ target of 60 per cent of median earnings should be
increased to the higher 60 per cent of median male earnings
The April 2019 increase in the ―national living wage‖ should at least match the £8.20
hourly rate specified by the Office for Budgetary Responsibility in following a straight
path toward the 60 per cent of median earnings target in 2020
The April 2019 increase in the minimum wage rates applicable to younger workers
should exceed the 4.7% increase applicable to the ―national living wage‖ in
recognition that the youth rates have seen a greater devaluation through inflation
than the full adult rate over recent years, youth unemployment rates have dipped to
their lowest level in a decade and a greater gap with the ―national living wage‖ will
encourage ―substitution‖ of workers.
The commission should propose the lowering of the age at which workers become
eligible for the ―national living wage‖ in recognition of the commission‘s previous
advocacy of 21 for the highest adult rate and recent evidence that raising wages for
this group does not generate negative employment outcomes
To address the contribution of contracts which rely heavily on non-guaranteed hours,
such as zero hours contracts, to the expansion of low pay employment in the UK the
commission should recommend the strengthening of legislation to prevent the bogus
classification of workers as ―self-employed‖ and extend the employment rights of
―workers.‖
The commission‘s calculation of the minimum wage ―bite‖ should be amended to take
account of operating surpluses and provide an improved reference point for the
affordability of minimum wage increases.
The commission should call on the government to ensure that additional financial
provision is made to fund the projected increase in the ―national living wage‖ up to
2020 for those working in the public services
The commission should take steps to tackle the scandalously large scale avoidance
of National Minimum Wage payment in some sectors by recommending that:
o When an employer has been found to be non-compliant with the NLW, HMRC
should extend their investigation to ascertain the level of arrears owed to all of the
workforce and ensure that all arrears are paid to the workers rather than allowing
4the employer to self-correct. These employers should then be named and
shamed for all the arrears that they owe their whole workforce.
o The government should allow workers and trade unions to scrutinise the final
sums presented by employers at the end of the self correction process. There
should also be an appeal process put in place for workers and trade unions who
dispute the level of arrears calculated by their employers.
o HMRC, BEIS and the Department of Health and Social Care should regularly
collect the details of social care employers commissioned by local councils, along
with the rates at which they are paid to provide the service and the steps that are
taken to ensure compliance with the minimum wage. This information could be
used to help target minimum wage compliance investigations. They should also
use this information from UNISON to check that all these employers have paid up
all the sleep-in arrears they owe to their care workers.
o As provided by section 12 of the 1998 National Minimum Wage Act, regulations
should be established requiring employers to provide their employers with a
statement demonstrating compliance with the National Minimum Wage.
o HMRC and BEIS should be asked to account for failure to prosecute any social
care employers on the basis that the requirements of Regulation 59 are too
vague to the Low Pay Commission and officially confirm whether they believe
Regulation 59 should be amended in order to make it much clearer what
information employers should produce in order to demonstrate compliance with
the National Minimum Wage.
52. EXECUTIVE SUMMARY
General economic context
Summary
Uncertainty caused by the UK‘s exit from the European Union continues to cloud
forecasts, but the general pattern over the last two years has been for actual GDP
growth to slightly outpace forecasts.
The general unemployment rate remains at relatively very low levels not seen in over
40 years.
Unemployment rate forecasts have been cut significantly since last year and are now
expected to remain down at around the 4.3% mark through 2019.
Inflation has accelerated sharply to now stand at 3.4% and the rate of increase in the
cost of living is expected to run at around 3% through 2019.
The Bank of England forecasts that pay settlements will average 3.1% in 2018.
Substantial growth in operating surpluses has outpaced employee compensation
over most recent years.
Overall, the outlook is one of steady if unspectacular growth in GDP, pay settlement
and cost of living growth settling around the 3% mark, alongside unemployment
remaining at near record lows.
Conclusions
UNISON believes that the Low Pay Commission has been vindicated over recent
years in deciding not to depart from a straight path in uprating the ―national living
wage‖ to reach the target 60% of median earnings by 2020. The extreme pessimism
of some GDP forecasts was not borne out and the inbuilt adjustment of the ―national
living wage‖ to changes in average earnings represents a sufficient insurance against
changed economic circumstances [the 2020 target rate has fallen from £9.16 when
the ―national living wage‖ was first introduced to £8.57 by March 2018].
UNISON believes that the latest developments in the economy offer no sound reason
to depart from raising the ―national living wage‖ again in 2019 according to the
planned straight line path toward 60% of median earnings.
The general employment level hasn‘t provided a sounder basis for increases in the
minimum wage since its inception.
Predicted changes in the cost of living mean that a 3% increase in 2019 rates would
be needed simply for the value of the minimum wage to stand still.
Forecasts suggest that employers are facing a similar general baseline 3% increase
in their paybill and the general increase in operating surpluses suggests that such
rates are well within their capacity.
6Factors affecting low-income groups
Summary
The ―national living wage‖ has contributed strongly to reducing low pay in the
economy when measured against average earnings, but when calculated to take
account of the cost of living actually experienced by workers, low pay has risen
sharply and is set to continue that trend.
Expansion of low pay is particularly linked to the private sector‘s intensified use of
insecure forms of contract, such as temporary and zero hours work.
Despite the ―national living wage,‖ low pay remains a particularly acute problem in
comparison to the OECD average and against most other comparable countries.
Though employment growth in the 28 lowest pay occupations has been subdued,
alternative employment in the 100 lowest paying occupations have been running at
almost double the average across the economy.
Neither the latest vacancy rates nor data on operating surpluses suggests particular
difficulties faced by the low-paying industries.
The Living Wage has seen rapid growth in its adoption by employers and is widely
seen as a standard benchmark of the wage needed to maintain a basic but decent
standard of living. The highest National Minimum Wage rate remains close to £1 an
hour lower than the Living Wage.
Numerous studies have shown that adoption of the Living Wage has resulted in
significant benefits to employers from improved recruitment, retention and motivation
The number of companies operating in low pay fields such as catering, cleaning and
security that have signed up as Living Wage Service Providers is testimony to a
willingness to improve earnings of low-paid staff where a level playing field is in
operation.
Changes to the welfare system introduced by the 2017 Budget are expected to
reduce annual income of working households by between £455 and £630 a year by
2020.
Conclusions
The ―national living wage‖ target rate of 60% of median earnings is a significant step
forward for tackling low pay in the UK. However, calculations based on median
earnings do not respond sufficiently to changes experienced by workers in the cost of
living. The Living Wage rates published annually by the Living Wage Foundation
remain the benchmark for achieving genuine reductions in low pay. The Living Wage
takes into account affordability for employers by linking the rate to average earnings
but it also responds to changes in the cost of living. (Appendix 2 to this evidence
shows how conversion can be achieved between the National Minimum Wage and
the Living Wage)
By pegging the ―national living wage‖ to median earnings for all employees aged over
25, increases are linked to a figure that has the gender pay gap incorporated into it.
In order to address the gender inequality that still prevails across the UK economy,
the ―national living wage‖ should be pegged to male median earnings for the target
age group.
7 To address the contribution of contracts which rely heavily on non-guaranteed hours,
such as zero hours contracts, to the expansion of low pay employment in the UK the
commission should recommend the strengthening of legislation to prevent the bogus
classification of workers as ―self-employed‖ and extend the employment rights of
―workers.‖
Factors affecting public service workers
Summary
Drastic budget cuts and, until recently, the public sector pay cap have formed the
backdrop to implementation of National Minimum Wage increases across the public
services.
Though there is much anecdotal evidence of cuts to staff terms and conditions, it is
extremely difficult to discern any direct link with the National Minimum Wage, given
the dominance of the budgetary background in driving changes.
The concrete information we do have is that the ―national living wage‖ has been
implemented across the public sector to apply to all staff regardless of age. Only the
apprentice rate is utilised as a much lower rate that stands outside of the pay scales.
Across 13 of UNISON‘s largest bargaining groups, over half already pay a minimum
rate above the planned 2019 ―national living wage,‖ while significant increases to
reach next year‘s rate are confined to certain pockets.
The Living Wage has made major strides across the public sector and if the NHS
(England) pay offer is accepted in its current format the number receiving less than
the Living Wage will drop by over 100,000. Local government, health and education
(except for schools) would be left employing 54,259 workers less than the Living
Wage, or 2.3% of the directly employed workforce.
The largest pool of minimum wage workers operate in privatised parts of public
services, with social care and facilities management functions such as catering,
cleaning and security forming the dominant slice. With provision in the hands of such
a multitude of fragmented providers, there is a lack of aggregate earnings and
employment data at the level of detail common within the public sector. However, on
the basis of data that is available for social care and early years provision, the rate of
increase in pay rates to achieve the 2020 ―national living wage‖ is barely above
forecast average earnings growth. Furthermore, the latest employment figures
available show sustained growth in the sectors and a huge drop-off in the turnover
rates plaguing social care where rates rise to the Living Wage.
Conclusion
The cost implications of the ―national living wage‖ for public sector employers and
their contractors need to be addressed through a specific government funding
allocation to meet those costs.
8Factors affecting young workers and apprentices
Summary
UNISON‘s case for bringing the youth rates up to the level of the ―national minimum
wage‖ can be summarised as follows:
o Paying a 24-year-old differently to a 25-year-old for doing exactly the same job is
a blatant injustice in the workplace;
o This injustice costs employers in terms of retention, morale and motivation of
young staff;
o In reality, employers do not apply the youth rate across large swathes of the
economy, reflecting concern both with unnecessary complexity and damage
caused by differentiation;
o Unemployment rates for young workers are at their lowest in a decade following
major falls over recent years;
o Inflation has taken a larger chunk out of the real value of youth rates than the full
rate over recent years
The case for bringing workers aged 21 or above up to the full minimum wage rate is
particularly overwhelming, as the evidence offers no substantial difference with the
economic situation facing older workers.
UNISON surveys point to a capacity to pay apprentices significantly higher rates as
well as some evidence of apprentices being used to undermine the employment of
staff on full rates of pay.
The growth in the cash value of the gap between most of the youth / apprentice rates
and the ―national living wage‖ increases the incentive to substitute workers on the full
rate.
Conclusions
The youth and apprentice rates should be brought up to the level of the ―national
living wage.‖
Closing of the gap with the ―national living wage‖ will reduce the incentive to violate
equality legislation, undermine the full rate and reduce employment of staff on the full
minimum wage rate or above
Increases of the boldness displayed in the introduction of the ―national living wage‖
are needed in the National Minimum Wage rates applicable to workers aged under
25 simply to restore their real value to their 2009 level. For 21-24-year-olds the
required rise is in the order of 6.8%, for 18-20-year-olds it is 11.1% and for 16-17-
year-olds it is 15.2%.
9Wider economic factors
Summary
Operating surpluses and shareholder dividends have outpaced increases in the
National Minimum Wage since 2010.
The minimum wage ―bite‖ is a flawed indicator of employers‘ ability to afford National
Minimum Wage increases as it fails to take into account operating surpluses.
Previous research for UNISON found that the bite on employers in terms of the
National Minimum Wage as a proportion of average wages and operating surpluses
has remained almost unchanged over recent years.
The Low Pay Commission‘s vast body of research on the impact of the National
Minimum Wage has found “little adverse effect on aggregate employment; the
relative employment shares of the low-paying sectors; individual employment or
unemployment probabilities; or regional employment or unemployment differences.”
Research by Landman Economics has found that the adoption of the Living Wage as
the National Minimum Wage would be likely to lead to a neutral effect on
employment.
Corporation tax cuts and National Insurance Contribution exemptions have had a
particularly sharp downward pressure on employer costs over recent years to
counterbalance increases resulting from the National Minimum Wage.
Conclusions
The Low Pay Commission‘s consideration of bite should take more explicit account of
operating surpluses and the Office for National Statistics should be required to collect
surplus data at the level of detail required to facilitate the commission‘s decision
making.
UNISON believes that the lack of evidence for rises in the National Minimum Wage
ever having resulted in significant damage to employment points to the conclusion
that rises have been well within the level that the labour market can bear. It is also a
reflection of the fact that too much importance is attached to the concerns of
individual employers about increased wage costs while insufficient importance is
given to aggregate benefits for employers resulting from higher demand in the
economy.
Enforcement of the National Minimum Wage
Summary
The self correction procedure is allowing the worst transgressors of National
Minimum Wage legislation in social care to avoid being named and shamed for the
full sum of arrears owed to their workers.
The government‘s decision to suspend enforcement of the ―national living wage‖ in
relation to sleep-in shifts carried out by care workers in July 2017 and to waive the
payment of penalties in some instances has undermined the minimum wage.
10 The government‘s legislation requiring employers to list the hours that workers have
been paid for on payslips fails to address the issues that allow employers in the
social care sector to routinely issue payslips that mask non-compliance.
Allowing care employers to not maintain sufficient minimum wage pay records is at
the heart of the problem of the widespread levels of non-compliance in the sector.
Conclusions
When an employer has been found to be non-compliant with the NLW, HMRC should
extend their investigation to ascertain the level of arrears owed to all of the workforce
and ensure that all arrears are paid to the workers rather than allowing the employer
to self-correct. These employers should then be named and shamed for all the
arrears that they owe their whole workforce.
The government should allow workers and trade unions to scrutinise the final sums
presented by employers at the end of the self correction process. There should also
be an appeal process put in place for workers and trade unions who dispute the level
of arrears calculated by their employers.
HMRC, BEIS and the Department of Health and Social Care should regularly collect
the details of social care employers commissioned by local councils, along with the
rates at which they are paid to provide the service and the steps that are taken to
ensure compliance with the minimum wage. This information could be used to help
target minimum wage compliance investigations. They should also use this
information from UNISON to check that all these employers have paid up all the
sleep-in arrears they owe to their care workers.
As provided by section 12 of the 1998 National Minimum Wage Act, regulations
should be established requiring employers to provide their employers with a
statement demonstrating compliance with the National Minimum Wage.
HMRC and BEIS should be asked to account for failure to prosecute any social care
employers on the basis that the requirements of Regulation 59 are too vague to the
Low Pay Commission and officially confirm whether they believe Regulation 59
should be amended in order to make it much clearer what information employers
should produce in order to demonstrate compliance with the National Minimum
Wage.
The Low Pay Commission‘s recommendation should be taken forward for the
government to establish a formal public protocol for HMRC to handle third party
whistleblowing on breaches of the NLW, which should include arrangements for
giving all possible feedback to relevant third parties and appropriate continuing
involvement in any resulting casework.
The Care Quality Commission should be given the power to inspect how local
authorities commission care services in order to help eradicate poor commissioning
practices which significantly contributes to widespread non-compliance with the
NMW in the care sector.
Transparency should be required around the rates councils pay their providers,
including the publication by each council of a breakdown showing how the fees paid
11cover pay, travel time, sleep-ins, other conditions, overheads and assumed profit
margins.
Spot inspections of provider payroll records, provision of clear and understandable
payslips and time sheets to staff should be carried out by councils, alongside
measures to ensure providers allow trade union representatives to consult staff to
ensure that the law is being complied with.
Councils should be told to carry out regular anonymous surveys of staff working for
commissioned providers in conjunction with local trade unions to identify any risks of
non-payment of the NMW.
123 GENERAL ECONOMIC CONTEXT
3.1 Economic growth
The value of UK economic output, as measured by the Gross Domestic Product (GDP), has
shown steady growth averaging 2.1% over the last seven years. In 2017, GDP grew by
1.7%, which marginally exceeded the forecast rate of 1.6% prevalent when the Low Pay
Commission last considered its recommendations1. This continued the pattern from 2016,
when forecasts influenced by the vote to leave the European Union proved overly
pessimistic.
GDP growth
1870000
1820000
GDP (£ million)
1770000
1720000
1670000
1620000
2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016
Source: Office for National Statistics (GDP based on chained volume measure seasonally adjusted)
The latest Office for Budgetary Responsibility forecasts state that the rate of growth of the
economy will average 1.5% in 2018, before dipping to 1.3% over 2019 and 2020, then
rising to 1.4% in 2021 and 1.5% in 20222.
However, the more recent average of independent forecasts published by the Treasury
now paints a significantly more upbeat picture of 1.5% in 2018, 1.6% in 2019, 1.7% in
2020 and 1.8% throughout 2021 and 2022.3
1
HM Treasury, Forecasts for the UK Economy, July 2017
2
Office for Budgetary Responsibility, Economic and Fiscal Outlook, March 2018
3
HM Treasury, Forecasts for the UK Economy, May 2018
13GDP forecast
2.0
1.8
Percentage annual increase
1.6
1.4
1.2
1.0
0.8
0.6
0.4
0.2
0.0
2018 2019 2020 2021 2022
Source: HM Treasury, Forecasts for the UK Economy, May 2018
UNISON has previously noted that uncertainty about the impact of the UK‘s exit from the
European Union is likely to prevail for a long time and the government itself stated in its
February 2016 publication The Process of Withdrawing from the European Union that ―a
vote to leave the EU would be the start, not the end, of a process. It could lead to up to a
decade or more of uncertainty.‖
3.2 Unemployment and turnover rates
The unemployment rate across the economy has declined markedly over the last six
years, with the proportion of the adult economically active population classified as
unemployed dropping from 8.6% in the three months to November 2011 to 4.2% by the
three months to March 2018. Consequently, the unemployment rate continues to stand at
its lowest levels in over 40 years.
The Office for Budgetary Responsibility‘s forecasts of unemployment rates have dropped
heavily for the coming years compared to when the Low Pay Commission considering
rates last year. The OBR now predicts that the rate will stand at 4.4% in 2018, 4.5% in
2019 and then plateau at 4.6% over the following three years. The latest average of
independent forecasts published by the Treasury in February 2018 painted an even lower
picture of rates over the next five years4.
4
HM Treasury, Forecasts for the UK Economy, May 2018
14Forecast unemployment rate
5
4.5
4
3.5
Percentage
3
2.5
2
1.5
1
0.5
0
2018 2019 2020 2021 2022
Source: HM Treasury, Forecasts for the UK Economy, May 2018
The 2017 XpertHR labour turnover report recorded a slight slowing in the median
voluntary resignation rates across the economy over the last year to 13.1%, but
nonetheless this represents a significant escalation since 2012, when the rate stood at
8.9%.
3.3 The cost of living
The inflation rate experienced by workers has generally been following a sharp upward trend
since 2016 and now stands at 3.4%, according to the Retail Prices Index.
Inflation rates
CPI RPI
6.0
5.0
% change over 12 months
4.0
3.0
2.0
1.0
0.0
Mar-14
Mar-12
Jun-12
Mar-13
Jun-13
Jun-14
Mar-15
Jun-15
Mar-16
Jun-16
Mar-17
Jun-17
Mar-18
Sep-12
Sep-13
Sep-14
Sep-15
Sep-16
Sep-17
Sep 11
Dec-11
Dec-12
Dec-13
Dec-14
Dec-15
Dec-16
Dec-17
-1.0
Year / Month
Source: Office for National Statistics, UK Consumer Price Inflation: April 2018, published May 2018
15Between 2010 and 2017, the cost of living, as measured by the Retail Prices Index, rose by
a total of 27.6%.
The table below shows how many core components of household expenditure have risen
even faster or at a similarly startling rate over the same period.
Expenditure item House Bus & coach Rail fares Electricity Gas
prices fares
Price rise 2010 -17 35% 44% 27% 36% 23%
The rate of increase in the cost of living experienced by workers is set to escalate at 3% or
above every year until 2022, following the pattern shown in the table below.
Year 2018 2019 2020 2021 2022
RPI forecast 3.4% 3.0% 3.0% 3.2% 3.2%
Source: HM Treasury Forecasts for the UK Economy, May 2018
If these rates turn out to be correct, the cost of living employees face will have grown by
almost 17% by the close of 2022, following the pattern set out in the graph below.
Forecast cumulative increase in cost of living
18.0 16.8
16.0
14.0 13.2
12.0
% increase
9.7
10.0
8.0 6.5
6.0
4.0 3.4
2.0
0.0
2018 2019 2020 2021 2022
16Reason for comparing wages to RPI
UNISON believes that the Retail Prices Index (RPI) remains the most accurate measure of
inflation faced by employees.
The most widely quoted figure for inflation in the media is the Consumer Prices Index,
However, UNISON believes that CPI consistently understates the real level of inflation for
the following reasons:
CPI fails to adequately measure one of the main costs facing most households in the
UK – housing. Almost two-thirds of housing in the UK is owner occupied, yet CPI
almost entirely excludes the housing costs of people with a mortgage;
CPI is less targeted on the experiences of the working population than RPI, since
CPI covers non-working groups excluded by RPI – most notably, pensioner
households where 75% of income is derived from state pensions and benefits, the
top 4% of households by income and tourists;
CPI is calculated using a flawed statistical technique that consistently under-
estimates the actual cost of living rises faced by employees. The statistical
arguments are set out exhaustively in the report ―Consumer Prices in the UK‖ by
former Treasury economic adviser Dr Mark Courtney, which can be found at
https://www.unison.org.uk/content/uploads/2014/11/TowebFull-report-Consumer-
Price-indices-in-the-UK2.pdf .
The Royal Statistical Society has consistently stated that CPI was never intended as a
measure of changes in costs facing households. Rather, it was ―designed in the 1990s for
macroeconomic purposes‖ and its purpose is to act ―as the principal inflation indicator for the
Bank of England in its interest-setting rate role.‖
The society sums up its position as follows:
―Why should the typical household accept an inflation index that: -
fails to take account of, or does not track directly, one of their main expenditure
items: mortgage payments and other costs of house purchase and renovation;
gives more weight to the expenditure patterns of wealthier households than of other
households;
fails to take account of interest on loans for a wide variety of purposes, ranging from
student loans to loans for car purchase;
includes the expenditure of foreign tourists in the UK but not their own expenditure
outside the UK;
fails to include Council Tax.‖
Following recommendations made by the National Statistician in 2016, the Office for
National Statistics (ONS) has now adopted the inflation measure CPIH as its ―most
comprehensive measure of inflation.‖ However, we believe that the National Statistician
tacitly acknowledged the inadequacy of CPI and CPIH as a measure of the changes in costs
facing workers by also requiring the ONS to develop a measure based on the Royal
Statistical Society‘s arguments for a household inflation index.
Though CPIH represents an improvement on CPI in attempting to incorporate housing costs,
17we believe that the rental equivalence method adopted by the ONS in its calculation does
not capture the real costs faced by owner occupiers as rents can form a poor proxy for
house price movements in the near to medium term. Furthermore, around two thirds of the
difference between CPI based measures and RPI is down to the aggregation method used
in their calculation and the downward bias of the geometric mean remains a feature of CPIH.
CPI is the figure quoted almost uniformly across the media, but RPI remains by far the most
common reference point for pay negotiations. Incomes Data Research found in its 2016
Reward Intentions Survey that 75% of employers regard RPI as the ―most relevant to making
decisions on the level of pay award,‖ compared to 53% for CPI, 5% for RPIJ and 3% for
CPIH.
3.4 Pay settlement and average earnings
Pay settlements across the economy are currently running at around 2.6%5 and the Bank of
England forecasts that pay settlements will average 3.1% over 20186. XpertHR reports that
pay settlements started 2018 by jumping to their highest level in four years.
Average earnings growth across the economy is similarly running at 2.5% and is expected to
follow the trajectory below toward 3.1% by 2022. However, the uncertainty in these figures is
reflected in the OBR‘s forecasts for average earnings growth in 2018. The March 2017
forecast put the rate at 2.7%, it was then revised down to 2.3% in November 2017 and then
back up to 2.7% by March 2018.
Forecast average earnings growth
3.5
3
3 2.7 2.8
2.4 2.5
2.5
% annual growth
2
1.5
1
0.5
0
2018 2019 2020 2021 2022
Source: Office for Budgetary Responsibility, Economic and Fiscal Outlook, March 2018
5
Labour Research Department, Payline Database
6
Bank Of England, Agents’ Summary Of Business Conditions, February 2018
183.5 Operating surpluses
Over the year from 2016 to 2017, operating surpluses across the economy grew by 3.6%.
This was slightly below the total compensation for employees at 4.3%. However, the longer
term trend since 2010 has been for employers to see their operating surpluses grow faster,
at almost 30%, than expenditure on compensating employees, at 23%.
Growth in operating surpluses
35.0%
29.9%
30.0%
25.0% 23.2%
Growth rate
20.0%
Change 2010 to 2017
15.0%
Change 2016 to 2017
10.0%
3.6% 4.3%
5.0%
0.0%
Gross operating surplus Compensation of
employees
Source: Office for National Statistics, Second Estimate of GDP, Quarter Q4 (Oct to Dec)
19Summary
Uncertainty caused by the UK‘s exit from the European Union continues to cloud
forecasts, but the general pattern over the last two years has been for actual GDP
growth to slightly outpace forecasts.
The general unemployment rate remains at relatively very low levels not seen in over
40 years.
Unemployment rate forecasts have been cut significantly since last year and are now
expected to remain down at around the 4.3% mark through 2019.
Inflation has accelerated sharply to now stand at 3.4% and the rate of increase in the
cost of living is expected to run at around 3% through 2019.
The Bank of England forecasts that pay settlements will average 3.1% in 2018.
Substantial growth in operating surpluses has outpaced employee compensation
over most recent years.
Overall, the outlook is one of steady if unspectacular growth in GDP, pay settlement
and cost of living growth settling around the 3% mark, alongside unemployment
remaining at near record lows.
Conclusions
UNISON believes that the Low Pay Commission has been vindicated over recent
years in deciding not to depart from a straight path in uprating the ―national living
wage‖ to reach the target 60% of median earnings by 2020. The extreme pessimism
of some GDP forecasts was not borne out and the inbuilt adjustment of the ―national
living wage‖ to changes in average earnings represents a sufficient insurance against
changed economic circumstances [the 2020 target rate has fallen from £9.16 when
the ―national living wage‖ was first introduced to £8.57 by March 2018].
UNISON believes that the latest developments in the economy offer no sound reason
to depart from raising the ―national living wage‖ again in 2019 according to the
planned straight line path toward 60% of median earnings.
The general employment level hasn‘t provided a sounder basis for increases in the
minimum wage since its inception.
Predicted changes in the cost of living mean that a 3% increase in 2019 rates would
be needed simply for the value of the minimum wage to stand still.
Forecasts suggest that employers are facing a similar general baseline 3% increase
in their paybill and the general increase in operating surpluses suggests that such
rates are well within their capacity.
204. FACTORS AFFECTING LOW INCOME GROUPS
Having set out UNISON‘s view of how broad developments in the UK economy should
shape the National Minimum Wage increases for 2019, this chapter looks at development in
specific factors affecting low income groups. It encompasses the scale of low-paid
employment in the UK, economic developments in the low-paying industries, the spread of
the Living Wage across the economy and the impact of tax and benefit changes.
4.1 Scale of low pay in the UK
The Resolution Foundation‘s 2017 Low Pay Britain report has again produced an exhaustive
analysis of the scale of low pay in Britain7
The research found that:
Close to one-in-five employees (19% or 5.1 million individuals) are paid less than
two-thirds of median gross hourly earnings in Great Britain.
Close to one-in-four employees (23% or 6.2 million individuals) are paid less than the
Living Wage rate defined by the Living Wage Foundation.
The foundation summarised the long term trends in these measures with the graph below.
The graph shows that the 7.5% increase in the highest tier of the minimum wage during
2016 brought about the largest drop in the proportion of workers earning less than two-thirds
of average earnings for over four decades. The foundation believes that this trend will
7
Resolution Foundation, Low Pay Britain, October 2017
21continue, pushing the proportion down to
16.2% by 2020, though that would still mean
that 4.3 million workers remain below the low-
pay threshold.
However, when measured against the Living
Wage, which accounts for the actual increase
in the cost of living faced by workers, the last
year has seen a continued deterioration in the
scale of low pay. The proportion of workers
falling below the threshold has accelerated
from around 15% in 2010 to over 23% just six
years later. The foundation indicated in its
2015 report that the proportion of the
workforce earning below the Living Wage will
grow further to 30% by 2020.
The report goes on to emphasise the known
tendencies of low pay to occur among certain
groups. The table to the right from the report
shows that a third of all workers on temporary /
casual contracts are low-paid. Among the
sectors of private, non-profit and public, the
private sector leads the way on low pay,
employing a quarter of its workforce on such
terms.
Comparison of the latest figures on the scale
of low pay shows that, despite improvements
in the minimum wage, the proportion of
workers below the two-thirds threshold is
worse than the OECD average and inferior to
most comparable countries for which 2016 statistics are available.
Low pay across countries
USA
Korea
Canada
Great Britain
Germany
OECD
Greece
Austria
Portugal
New Zealand
0 5 10 15 20 25 30
% workers on wages less than two-thirds median earnings
Source: https://data.oecd.org/earnwage/wage-levels.htm
22Though we see the extension of insecure forms of contract such as zero hours working as a
significant factor in the growth of low pay in the UK, we have doubts about the idea put
forward by the Taylor Review of Modern Working Practices to establish a different minimum
wage rate applicable for hours that are ―non-guaranteed‖ as the most effective way of
addressing the problem.
With five tiers of the National Minimum Wage already in place, such a proposal would add a
further tier to the system and UNISON has always argued for a simple, single unified system
that treats all workers equally in the interests of fairness.
Differential minimum wage rates may not greatly discourage employers from offering
insecure forms of contract that often rely heavily on non-guaranteed hours unless the extra
cost is substantial to outweigh the cost savings of reduced hours and the diminished
employment rights that usually accompany such contracts.
However, a differential could act as an inducement that may actually expand low pay
employment further and encourage workers in a weak bargaining position to give up the
employment rights that that are guaranteed by law for a ―worker‖ or ―employee.‖
We believe that the more effective way of addressing the way these contracts contribute to
expanding the scale of low pay in the UK lies in legislation that assists in preventing the
bogus classification of workers as ―self-employed‖ and extending the employment rights of
―workers.‖
In this vein, the Resolution Foundation conducted valuable analysis of the minimum wage in
2017 which showed the extent to which those not classified as ―employees‖ contribute to low
pay in the UK, as reflected in the graph below8.
8
Resolution Foundation, The Minimum Required? Minimum Wages and the Self Employed, July 2017
23Their study came to the following conclusion;
The minimum wage revolutionised the lower end of the UK‘s labour market, protecting
employees from exploitation. But the self-employed – now one in seven of the workforce –
are not entitled to the minimum wage. With growing concerns over their earnings and
conditions, particularly in the so-called gig economy, extending the minimum wage to some
of this group has been discussed. While a minimum wage would not be appropriate for the
majority of the self-employed, for those who take work from firms or platforms and – crucially
– don‘t have control over the price they charge, moves to reduce exploitatively low pay
would be both meaningful and welcome. Existing legislation on ‗piece work‘ done by
employees provides a useful template, in which firms offering work complete a test to ensure
that a person working at an average pace could be expected to earn at least the minimum
wage while carrying out the task. This measure alone will not assuage fears about poor
quality self-employment; greater enforcement of existing employment law to prevent workers
from being wrongly classified as self-employed is vital, as well as moves to close the gap in
the tax and benefit treatment of self-employed and employee
4.2 Employment, vacancy and profit rates in low-pay sectors
Our analysis of the 28 lowest paying occupations9 indicates that employment growth
remained positive in the year to June 201710 at 0.12%. While this was below the economy
average of 1.06%, the 100 lowest pay occupations recorded employment growth well
above the average at 2.02%, suggesting that there are reasonably strong alternative
employment opportunities across the broad classification of low paid occupations (the
calculation of these figures is set out in Appendix 1)
The latest CIPD Labour Market Outlook survey reinforces this picture, showing that
employment confidence is higher among employers in the hospitality sector than every
other part of the economy other than construction.11
The vacancy rate across the economy currently stands at 2.8%.12 Sectors that would be
expected to contain a high proportion of low-paid workers, such as retail, accommodation
and food services, and human health and social work, all displayed higher vacancy rates
than the average across the economy, as shown by the graph below.
9
Based on those occupations where more than 50% of employees receive below the Living Wage, according the IHS Market Report, Living
Wage Research for KPMG, 2016
10
Office for National Statistics, Employment by Occupation, August 2018
11
Chartered Institute of Personnel Development, Labour Market Outlook, Winter 2017-18
12
Office for National Statistics, Labour Market Statistics, March 2018
24Vacancy rates
5.0
4.5
4.0
3.5
3.0
Percentage
2.5
2.0
1.5
1.0
0.5
0.0
Wholesale & retail trade; repair of motor vehicles …
Water supply, sewerage, waste & remediation …
Retail
Mining & quarrying
Manufacturing
Wholesale
Education
Motor Trades
Real estate activities
Construction
Transport & storage
Professional scientific & technical activities
Administra-tive & support service activities
Other service activities
Information & communication
Accomodation & food service activities
Financial & insurance activities
Human health & social work activities
Electricity, gas, steam & air conditioning supply
Arts, entertainment & recreation
Public admin & defence; compulsory social security
All vacancies
Total services
What little detail is available from the ONS also suggests that the industries with the highest
proportion of low-paid staff have seen operating surpluses grow at least as quickly as the
average across the economy. The graph below shows the increase in operating surplus and
mixed income (the ONS does not separate out the figures), between 2010 and 2015 (the
latest data available in the Blue Book 2017). Of the categories analysed, distribution,
transport, hotels and restaurants would be expected to contain the highest proportion of low-
paid staff, yet its surplus growth rate of 27.8% outpaces the economy average of 24.3%.
25Growth in surplus by industry
50.0%
40.0%
30.0%
20.0%
10.0%
0.0%
-10.0%
4.3 Spread of the Living Wage and contrast to NMW
The Joseph Rowntree Foundation‘s calculation of the Minimum Income Standard (MIS),
based on what members of the public think people need to achieve a socially acceptable
standard of living, puts the 2017 figure at £17,900 for a single person and £20,400 each for
a couple with two children, both working full-time13. The foundation found that a couple with
two children working full time on the ―national living wage‖ fall between 5% and 13% short of
the MIS depending on the level of benefit payments they receive, while a single person falls
22% short.
The MIS basket of goods feeds into the calculation of the Living Wage, which is announced
every November by the Living Wage Foundation. In 2017, the rate for outside of London was
set at £8.75 and the rate for London was set at £10.20 an hour.
The £8.75 figure is a weighted composite of the wage needed by a variety of different
household types. The hourly wage for different households ranges from £6.15 for a couple to
£19.10 for a lone parent with three children.
Adoption of the Living Wage has expanded with astonishing speed over recent years to
become a widely quoted benchmark of the minimum earnings needed for low-paid staff to
have a ―basic but acceptable‖ standard of living.
13
Joseph Rowntree Foundation, A Minimum Income Standard for the UK in 2017, July 2017
26There are now in excess of 3,500 employers accredited as Living Wage employers by the
Living Wage Foundation, a figure that has grown from around 200 just six years ago.
The Living Wage is now paid by some of the UK‘s most high profile private companies, such
as Barclays, HSBC and KPMG. It has even made inroads into traditionally low-paying areas
such as the retail sector, where IKEA and Lidl have signed up as Living Wage employers.
The Living Wage has now reached the point that over a third of the FTSE 100 companies
are accredited.
While the Living Wage has been gaining ever greater inroads, the graph below shows how
the gap between the Living Wage and the highest minimum wage tier has diminished since
the introduction of the ―national living wage‖ but remains close to £1 an hour. Therefore, for a
full-time worker on a 37-hour week, the highest National Minimum Wage is £1,775 a year
short of the wage needed for a basic but acceptable standard of living.
Shortfall between highest national
minimum wage and Living Wage
2012 2013 2014 2015 2016 2017 2018
£0.00
-£0.20
-£0.40
-£0.60
-£0.80
-£1.00 -£0.92
-£0.95
-£1.01 -£1.05
-£1.20
-£1.14 -£1.15 -£1.15
-£1.40
The benefits of the Living Wage for employers was demonstrated by the Living Wage
Foundation‘s most recent survey of more than 800 accredited real Living Wage businesses,
ranging from SMEs to FTSE 100 companies.
The survey found that employers experienced a range of benefits from increasing the wage
of low-paid staff, most notably stating that Living Wage accreditation has14:
- enhanced the organisation‘s reputation as an employer (86%)
- improved relations between staff and managers (58%)
- increased commitment and motivation of Living Wage employees (57%)
- improved recruitment of employees into jobs covered by the Living Wage (53%)
It also found that Living Wage accreditation has not:
- increased the organisation‘s bill for subcontracted services (68%)
- made it more difficult to win contracts from clients as costs are higher (87%)
- led to difficulty in recruiting to team leader or supervisory positions (81%)
14
The proportion of employers supporting each finding is shown in brackets
27Trends in the rapid escalation of private companies as accredited Living Wage employers
despite the competitive disadvantage, in crude cost terms, that it may place on them shows
that there is an appetite and capacity to pay the Living Wage.
However, many are held back by the absence of a level playing field, given that the National
Minimum Wage stands so far behind the Living Wage.
An open letter from chief executives published in September 2014 on the future of the
National Minimum Wage made it apparent the ―level playing field‖ was one of the most
valued dimensions of the National Minimum Wage, by stating:
"For businesses, it has created a level playing field, enabling employers to improve
business performance and staff conditions without fear of being undercut by
companies competing on lower wage rates”.
The readiness to commit to the Living Wage when it is on the basis of a level playing field is
also demonstrated by the range of companies who have signed up to the Living Wage
Foundation‘s category of Living Wage Service Providers.
These employers do not commit to paying the Living Wage to all staff, but they
―always supply a Living Wage bid alongside every market rate submittal to all of their
prospective and current clients.‖
Dominated by cleaning, catering and facilities management companies, the list of signatories
includes major providers, such as ISS, OCS and Sodexo.
While it may be relatively easy to sign up to the Living Wage in sectors where low wages
account for a small part of the pay bill, in sectors where low wage employment forms a major
part of the workforce, such as cleaning, catering and social care, the Living Wage is only
likely to be delivered through the lead and level playing field that a legal minimum provides.
4.4 Impact of tax and benefit changes
Changes to minimum wage rates have to be seen in the context of changes to the tax and
benefit system that have a major impact on low-paid workers.
Household income for people on low incomes consists of pay and in-work support provided
by the government and so needs to be seen in the context of reductions in the system of ‗in-
work‘ support that is provided through tax credits and housing benefit.
The 2015 budget introduced a four year benefit freeze from April 2016, resulting in a halt in
any uprating of most working age benefits until 2020 (local housing allowances are one
exception to this rule). The Resolution Foundation has calculated that the impact of changes
to the benefit system following the 2017 budget will be a £455 drop in the annual income of
a single parent in work with one child to look after and a £630 drop for a two parent family
composed of a single earner and two children.15
15
Resolution Foundation, Freshly Squeezed, November 2017
28The Joseph Rowntree Foundation has also looked specifically at the impact on working
families receiving the ―national living wage‖ and found that the combined effect of welfare
cuts and the increased cost of living more than wiped out the value of the increase in the
national living wage.‖ The value of the weekly loss varied from £9 a week to £17 a week
depending on the particular family type, as shown by the graph below.
Their analysis came to the general conclusion that ―for every extra pound earned, 75p is
typically lost by low earning families in additional tax and reduced tax credits or Universal
Credit.‖16
16
Joseph Rowntree Foundation, Living standards squeeze tightens despite pay rises and tax cuts, July 2017
2930
Summary
The ―national living wage‖ has contributed strongly to reducing low pay in the
economy when measured against average earnings, but when calculated to take
account of the cost of living actually experienced by workers, low pay has risen
sharply and is set to continue that trend.
Expansion of low pay is particularly linked to the private sector‘s intensified use of
insecure forms of contract, such as temporary and zero hours work.
Despite the ―national living wage,‖ low pay remains a particularly acute problem in
comparison to the OECD average and against most other comparable countries.
Though employment growth in the 28 lowest pay occupations has been subdued,
alternative employment in the 100 lowest paying occupations have been running at
almost double the average across the economy.
Neither the latest vacancy rates nor data on operating surpluses suggests particular
difficulties faced by the low-paying industries.
The Living Wage has seen rapid growth in its adoption by employers and is widely
seen as a standard benchmark of the wage needed to maintain a basic but decent
standard of living. The highest National Minimum Wage rate remains close to £1 an
hour lower than the Living Wage.
Numerous studies have shown that adoption of the Living Wage has resulted in
significant benefits to employers from improved recruitment, retention and motivation
The number of companies operating in low pay fields such as catering, cleaning and
security that have signed up as Living Wage Service Providers is testimony to a
willingness to improve earnings of low-paid staff where a level playing field is in
operation.
Changes to the welfare system introduced by the 2017 Budget are expected to
reduce annual income of working households by between £455 and £630 a year by
2020.
Conclusions
The ―national living wage‖ target rate of 60% of median earnings is a significant step
forward for tackling low pay in the UK. However, calculations based on median
earnings do not respond sufficiently to changes experienced by workers in the cost of
living. The Living Wage rates published annually by the Living Wage Foundation
remain the benchmark for achieving genuine reductions in low pay. The Living Wage
takes into account affordability for employers by linking the rate to average earnings
but it also responds to changes in the cost of living. (Appendix 2 to this evidence
shows how conversion can be achieved between the National Minimum Wage and
the Living Wage)
By pegging the ―national living wage‖ to median earnings for all employees aged over
25, increases are linked to a figure that has the gender pay gap incorporated into it.
In order to address the gender inequality that still prevails across the UK economy,
the ―national living wage‖ should be pegged to male median earnings for the target
age group.
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