UNISON evidence to the Low Pay Commission on minimum wage rates for 2018

Transcription

1 UNISON evidence to the Low Pay Commission on minimum wage rates for 2018 July 2017

2 CONTENTS INTRODUCTION SUMMARY OF RECOMMENDATIONS EXECUTIVE SUMMARY ECONOMIC CONTEXT Economic growth Labour market The cost of living Pay settlement and average earnings FACTORS AFFECTING LOW INCOME GROUPS Scale of low pay in the UK Impact of inflation on real value of National Minimum Wage Spread of the Living Wage and contrast to NMW Impact of tax and benefit changes PUBLIC SERVICE CONTEXT Broad pattern of low pay in public services Low pay by sector YOUNG WORKERS AND APPRENTICES Young workers Apprentices Undermining of the national living wage WIDER ECONOMIC FACTORS Comparison of NMW growth to high income groups Flaws in minimum wage bite as indicator of affordability Macroeconomic employment impact Tax changes for employers ENFORCEMENT OF THE NATIONAL MINIMUM WAGE General scale of non-compliance Non-compliance in the home care sector Steps needed to enable enforcement APPENDIX 1 - Example scenario for conversion

3 INTRODUCTION 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. 3

4 1. 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 National Minimum Wage rates should be harmonised into a single rate across all age groups While the current National Minimum Wage system prevails, 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 2018 increase in the national living wage should at least match the 7.90 hourly rate set out by the Office for Budgetary Responsibility in following a straight path toward the 60 per cent of median earnings target in 2020 The April 2018 increase in the minimum wage rates applicable to younger workers and apprentices should exceed the 5.3% increase applicable to the national living wage in recognition that the youth rates have lagged behind the full adult rates, economic growth has come in substantially above 2016 forecasts, a surge in inflation is set to devalue earnings and youth unemployment rates have dipped to their lowest level in a decade 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 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 o As provided for by section 12 of the 1998 National Minimum Wage Act, regulations should be established requiring employers to provide their workers with a statement demonstrating compliance with the National Minimum Wage When an employer has been found to be non-compliant with the NMW, HMRC should extend their investigation to ascertain the level of arrears owed to all of the workforce rather than allowing the employer to self-correct. 4

5 o If HMRC is unwilling to extend their NMW investigation to cover all the workforce when they identify non-compliance for an individual worker, they should be made to carry out assurance checks on employers who have selfcorrected and publish the results of these findings. They should also strengthen the assurance process by increasing the range of information sources HMRC uses to monitor self-correction by speaking to local trade unions in addition to the workers. o o Enforcement action is intensified to reduce the number of workers paid less than the NMW as a result of small lump sum payments for 'sleep-in' shifts. Given the particular scale of non-compliance with the NMW in the care sector, HMRC should resume collection of details on the number of care workers (both homecare and residential care) who call the Pay and Rights Helpline. o The Low Pay Commission s previous recommendation that the government establishes a formal public protocol for HMRC to handle third party whistleblowing on breaches of the NMW should be carried through, with arrangements for giving all possible feedback to relevant third parties and appropriate continuing involvement in any resulting casework. 5

6 2. EXECUTIVE SUMMARY Economic context Summary The economy is expected to grow by 2% over 2017 around three times the rate anticipated when the Low Pay Commission was considering evidence last year. Uncertainty caused by the UK s exit from the European Union continues to cloud forecasts beyond 2017, though a much shallower dip in GDP is expected in the nearterm than was initially anticipated after the referendum vote. The general unemployment rate is now at its lowest level in over 40 years. The opening months of 2017 have seen the unemployment rate for 16-to-17-yearolds at its lowest level in over a decade and the rate for 18-to-24-year-olds at its lowest in over 11 years. The current unemployment rate for 18-to-24-year-olds is almost half what it was just over five years ago and the current unemployment rate for 16-to-17-year-olds is almost 30% lower over the same period. Inflation has accelerated sharply over the opening months of 2017 and is expected to average 3.6% over the year, then continue at 3.3% into Average earnings growth is expected to run at 2.6% over 2017, then continue at 2.7% into Overall, the outlook is one of steady growth in GDP and average earnings, a jump in the cost of living and unemployment remaining at near record lows. Conclusions UNISON believes that the Low Pay Commission was vindicated last year in deciding not to depart from a straight path in uprating the national living wage to reach the target 60% of median earnings by The failure of a sharp dip in GDP to materialise showed that it would have been premature to deviate from the planned path on the basis of highly uncertain forecasts and the inbuilt adjustment of the national living wage to changes in average earnings represents a sufficient insurance against changed economic circumstances. (Appendix 1 to this evidence shows how conversion can be achieved between the National Minimum Wage and the Living Wage) With uncertainty still high but forecasts showing a much shallower dip in GDP, UNISON believes that the national living wage should be raised again in 2018 according to the planned straight line path toward 60% of median earnings. The rise in the 2017 youth minimum wage rates appeared to be held back by the commission s concerns about the predicted sharp decline in GDP. Recognition that this decline failed to materialise and more optimistic forecasts for GDP into 2018 provides a strong basis for closing the gap with the national living wage. 6

7 The general employment level hasn t provided a sounder basis for increases in the minimum wage since its inception and youth unemployment hasn t provided a sounder basis in over a decade. With the cost of living escalating sharply, a 3.3% increase in 2018 rates would be needed simply for the value of the minimum wage to stand still. Factors affecting low-income groups Summary Conclusions The scale of low pay in the economy has remained steady at around one in five workers based on measurements linked to average earnings, but when calculated to take account of the cost of living, low pay has risen sharply and is set to continue that trend. The national living wage is expected to improve the UK s position in comparison to other European countries, but low pay is set to remain a much more widespread problem compared to the average among EU countries. Inflation has reduced the real value of all National Minimum Wage rates applying to staff under the age of 25 since The value of the rate applicable to yearolds is over 300 less than it was eight years ago. The devaluation suffered by year-olds is even greater, with their current wage now worth more than 700 less than seven years ago. 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 almost 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 exists. The call for a minimum wage of 10 an hour has gained traction across the UK, with the Labour Party and TUC adopting policies for its attainment. UNISON supports this target. The combined impact of tax and welfare changes is expected to reduce the standard of living for low-income households over the next three years, even where households benefit from increases in the National Minimum Wage. 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. 7

8 Major increases are needed in all National Minimum Wage rates applicable to workers aged under 25 simply to restore their real value to their 2009 level. For year-olds the required rise stands at 4.9%, for year-olds at 9.9% and for year-olds at 12.4%. 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. Public service context Summary Drastic budget cuts and the public sector pay cap form 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 budgetary background. 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 10 of UNISON s largest bargaining groups, half already pay a minimum rate above the planned 2018 national living wage, while relatively small increases are required to bring the other bargaining groups up to the rate by next year. The Living Wage has made major strides across the public sector. However, low pay remains a substantial issue that demands addressing our best estimate is that, across our major bargaining groups for local government, health and education, 115,904 staff are paid below the Living Wage, constituting 5.7% 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 does not appear excessively above forecast average earnings growth. Furthermore, the latest employment figures show sustained growth in these sectors. 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. 8

9 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 o o o 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; This injustice costs employers in terms of retention, morale and motivation of young staff; 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; Unemployment rates for young workers are at their lowest in a decade following major falls over recent years; Inflation has taken a larger chunk out of the real value of youth rates than the full rate over recent years Some evidence has emerged 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 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. Wider economic factors Summary Operating surpluses, FTSE 100 chief executive pay and shareholder dividends have all outpaced increases in the National Minimum Wage since 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. The bite on employers in terms of the National Minimum Wage as a proportion of average wages and operating surpluses has remained almost unchanged since 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. 9

10 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 number of workers identified as being owed arrears for under payment of the National Minimum Wage more than doubled in the year to , while the scale of arrears more than trebled to 10.3m. The HMRC found that, between 2011 and 2015, 41% of care providers were guilty of non-compliance with the National Minimum Wage. The Resolution Foundation has calculated that care workers are collectively cheated of 130m a year due to sub minimum wage pay. 10% of staff aged over 24 among group based providers of childcare and early years education received less than the national living wage in % of apprentices are estimated to be paid less than the minimum wage and noncompliance is at its greatest among the youngest apprentices. In the homecare sector, the huge scale of underpayment is linked to failure to tackle the largest homecare providers, minimal naming and shaming of employers, the practice of allowing non-compliant providers to self-correct, lack of clarity in payslips and access to information for checking payslips, consistent failure to capture the full scale of arrears, sub-standard commissioning guidance for local councils and an over reliance on care workers making complaints to HMRC 10

11 Conclusions As provided for by section 12 of the 1998 National Minimum Wage Act, regulations should be established requiring employers to provide their workers with a statement demonstrating compliance with the National Minimum Wage. When an employer has been found to be non-compliant with the National Minimum Wage, HMRC should extend their investigation to ascertain the level of arrears owed to all of the workforce rather than allowing the employer to self-correct. If HMRC is unwilling to extend their National Minimum Wage investigation to cover all the workforce when they identify non-compliance for an individual worker, they should be made to carry out assurance checks on employers who have selfcorrected and publish the results of these findings. They should also strengthen the assurance process by increasing the range of information sources HMRC uses to monitor self-correction by speaking to local trade unions in addition to the workers. Intensify enforcement action to reduce the number of workers paid less than the National Minimum Wage as a result of small lump sum payments for 'sleep-in' shifts. Given the particular scale of non-compliance with the National Minimum Wage in the care sector, HMRC should again keep details of the number of care workers (both homecare and residential care) who call the Pay and Rights Helpline. The Low Pay Commission s recommendation that the government establishes a formal public protocol for HMRC to handle third party whistleblowing on breaches of the National Minimum Wage should be carried through, with arrangements for giving all possible feedback to relevant third parties and appropriate continuing involvement in any resulting casework. 11

12 GDP ( million) 3 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 2016, GDP grew by 1.8%, which exceeded the forecast rate of 1.6% prevalent in the immediate aftermath of the referendum to exit the European Union 1. GDP growth 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 2% in 2017, before dipping to 1.6% and then returning to 2% by The 2017 forecast represents a major recovery on the rates predicted when the Low Pay Commission was considering evidence for the 2017 minimum wage levels. In August of last year, GDP growth for 2017 was predicted at just 0.7%, 2 making the anticipated actual rate almost three times higher than forecast. The OBR s 2% forecast for 2017 is in line with the revised forecasts also put forward by the International Monetary Fund and the Bank of England, making the UK the second fastest growing major advanced economy over the year. Uncertainty about the impact of the UK s exit from the European Union continues to cloud economic forecasts, however, the majority of predictions are now based on a much shallower dip in growth. UNISON emphasised last year that the uncertainty was likely to prevail for a long time and noted that 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. 1 HM Treasury, Forecasts for the UK Economy, August HM Treasury, Forecasts for the UK Economy, August

13 Sep-Nov 2011 Jan-Mar 2012 May-Jul 2012 Sep-Nov 2012 Jan-Mar 2013 May-Jul 2013 Sep-Nov 2013 Jan-Mar 2014 May-Jul 2014 Sep-Nov 2014 Jan-Mar 2015 May-Jul 2015 Sep-Nov 2015 Jan-Mar 2016 May-Jul 2016 Sep-Nov 2016 Jan-Mar 2017 Percentage Percentage annual increase 2.5 GDP forecast Source: OBR Economic and Fiscal Outlook, March 2017 With Article 50 of the Lisbon Treaty triggered nine months on from the referendum, the specified two year process for agreeing the terms of withdrawal has only recently begun and, once outside the EU, the UK is expected to have to negotiate trade deals with over 50 countries that currently have deals with the EU. 3.2 Labour market Unemployment rates The unemployment rate across the economy has shown a steady decline for over five 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 4.7% by the three months to April Unemployment rates year olds year olds year olds Source: ONS, Labour Market Statistics, June 2017 (seasonally adjusted rates) 13

14 Percentage Looking back over a longer timeframe, the unemployment rate has not been lower in the UK for over 40 years. While the unemployment rate for younger groups remains substantially higher, the rate has shown major declines and the gap with the general rate has been shrinking considerably. Since its 2011 peak, the unemployment rate for 16-to-64-years-olds has fallen by 3.9 percentage points, while the rate for 16-to-17-year-olds has dipped much more sharply by 11.5 percentage points and the rate for 18-to-24-year-olds has fallen by 9.6 percentage points. Consequently today s unemployment rate for 18-to-24-year-olds is almost half what it was just over five years ago and today s unemployment rate for 16-to-17-year-olds is almost 30% lower over the same period. Over the last year, the unemployment rate for 16-to-64-years-olds has dropped by 0.4 percentage points, but again the fall has been greater among 16-to-17-year-olds at 0.7 percentage points and 18-to-24-year-olds at 1.2 percentage points. 0.0 Decline in unemployment rate year olds year olds year olds Decline in unemployment rate since Nov 2011 Decline in unemployment rate over last year This meant that the average unemployment rate for 16-to-17-year-olds over the first four months of 2017 stood at its lowest level in over a decade and the rate for 18-to-24-yearolds in March 2017 stood at its lowest in over 11 years. The Low Pay Commission set out in its 2016 report that it was concerned that the employment prospects of young workers frequently take the hardest hit in an economic downturn and with widespread forecasts at the time of GDP growth losing two-thirds of its value in 2017, this appeared a major risk to the commission. However, as noted above, no such downturn has materialised in 2017 and forecasts beyond are much less alarming. 14

15 Percentage The Office for Budgetary Responsibility predicts that the unemployment rate will remain stable at 4.9% over 2017 before a slight rise takes it just above the 5% mark over the following four years. Again, these figures represent an improvement on the forecasts prevalent when the Low Pay Commission was considering evidence for the 2017 minimum wage levels Forecast unemployment rate Source: OBR Economic and Fiscal Outlook, March 2017 Within industry sector, we do not detect any indication that typically low-paying sectors have performed worse in terms of employment than the economy average over the last year. Indeed, accommodation and food services saw greater employment growth than any other sector, at 8% over the year to December Turnover The 2016 XpertHR labour turnover report recorded a further rise in median voluntary resignation rates across the economy from 9.9% in 2013 to 14.1% in 2015, with private sector services showing a jump from 10.4% to 15.2% Median turnover rates (based on the proportion of employees who leave an organisation for any reason resignation, retirement, dismissal or redundancy) rose from 16% to 18.5% between 2013 and 2015, with private services showing a jump from 17.5% to 20.3% and public sector services rising from 10.1% to 14.7%. The state of the UK labour market is also refected in the latest Markit / Recruitment & Employment Confederation Report on Jobs, which recorded in June 2017 that a aharp and accelerated increase in permanent staff placements took place across the UK. Furthermore, the rate of expansion was the fastest for 25 months. Temp billings also rose at a steeper pace, and recorded the strongest rate of growth since March Conversely, the number of candidates for jobs continued to decline sharply, falling at the quicket pace since August

16 May-11 Aug 11 Nov 11 Feb-12 May-12 Aug-12 Nov-12 Feb-13 May-13 Aug-13 Nov-13 Feb-14 May-14 Aug-14 Nov-14 Feb-15 May-15 Aug-15 Nov-15 Feb-16 May-16 Aug-16 Nov-16 Feb-17 May-17 % change over 12 months 3.3 The cost of living Overview The inflation rate experienced by workers escalated sharply over 2016 and jumped to 3.7% according to the Retail Prices Index in May The jump returned inflation to the kind of rates prevalent during most of 2013, which was preceded by a two year period when inflation centred on the 5% mark. Inflation rates CPI RPI Year / Month Source: Office for National Statistics, UK Consumer Price Inflation, May 2017 Between 2010 and 2016, the cost of living, as measured by the Retail Prices Index, rose by a total of 22.6%. However, the average figure can mask even sharper rises within some core components of workers expenditure. The table to the right shows how house prices, energy and transport costs have outpaced the general rate. Expenditure item % price rise House prices 31% Electricity 28% Bus & coach fares 26% Gas 24% Rail fares 24% 16

17 % increase Forecast inflation rates The increase in inflation apparent over the first months of 2017 is expected to continue, with the RPI rate averaging 3.5% during 2017 and continuing at 3.4% into The medium-term forecast puts the expected rates at the levels shown to the right until If these rates turn out to be correct, the cost of living employees face will have grown by almost 18% by the close of 2021, following the pattern set out in the graph below. Year RPI forecast Source: HM Treasury Forecasts for the UK Economy, June Forecast cumulative increase in cost of living These forecast levels show the minimum levels needed if the Low Pay Commssion is to meet the commitment set out in its 2014 report to recommend progressive real increases in the value of the minimum wage. 17

18 Reason 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 underestimates 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 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 November last year, 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. 18

19 % annual growth Though CPIH represents an improvement on CPI in attempting to incorporate housing costs, we 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% 3 and settlements are expected to show a slight improvement to average 2.2% over 2017 in the private sector 4. Average earnings growth across the economy is similarly running at 2.1% and again is expected to follow an upward trajectory, averaging 2.6% over 2017 before steadily rising to 3.6% by Forecast average earnings growth Source: Office for Budgetary Responsibility, Economic and Fiscal Outlook, March Labour Research Department, Payline Database 4 Bank of England, Agents Summary of Business Conditions, February

20 Summary The economy is expected to grow by 2% over 2017 around three times the rate anticipated when the Low Pay Commission was considering evidence last year. Uncertainty caused by the UK s exit from the European Union continues to cloud forecasts beyond 2017, though a much shallower dip in GDP is expected in the near term than was initially anticipated after the referendum vote. The general unemployment rate is now at its lowest level in over 40 years. The opening months of 2017 have seen the unemployment rate for 16-to-17-yearolds at its lowest level in over a decade and the rate for 18-to-24-year-olds at its lowest in over 11 years. The current unemployment rate for 18-to-24-year-olds is almost half what it was just over five years ago and the current unemployment rate for 16-to-17-year-olds is almost 30% lower over the same period. Inflation has accelerated sharply over the opening months of 2017 and is expected to average 3.6% over the year, then continue at 3.3% into Average earnings growth is expected to run at 2.6% over 2017, then continue at 2.7% into Overall, the outlook is one of steady growth in GDP and average earnings, a jump in the cost of living and unemployment remaining at near record lows. Conclusions UNISON believes that the Low Pay Commission was vindicated last year in deciding not to depart from a straight path in uprating the national living wage to reach the target 60% of median earnings by The failure of a sharp dip in GDP to materialise showed that it would have been premature to deviate from the planned path on the basis of highly uncertain forecasts and the inbuilt adjustment of the national living wage to changes in average earnings represents a sufficient insurance against changed economic circumstances. With uncertainty still high but forecasts showing a much shallower dip in GDP, UNISON believes that the national living wage should be raised again in 2018 according to the planned straight line path toward 60% of median earnings. The rise in the 2017 youth minimum wage rates appeared to be held back by the commission s concerns about the predicted sharp decline in GDP. Recognition that this decline failed to materialise and more optimistic forecasts for GDP into 2018 provides a strong basis for closing the gap with the national living wage. The general employment level hasn t provided a sounder basis for increases in the minimum wage since its inception and youth unemployment hasn t provided a sounder basis in over a decade. With the cost of living escalating sharply, a 3.3% increase in 2018 rates would be needed simply for the value of the minimum wage to stand still. 20

21 4. 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 2018, this chapter looks at development in specific factors affecting low income groups. It encompasses the scale of low-paid employment in the UK, changes in the relative value of the National Minimum Wage, developments in the spread of the Living Wage 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 Britain 5 The research found that: More than one-in-five employees (21% or 5.7 million individuals) were paid less than two-thirds of median gross hourly earnings in Great Britain. Close to one-in-four employees (23% or 6.3 million individuals) were 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. While the low pay measure against earnings has been fairly flat for the last two decades, the Living Wage measure has been rising sharply and this trend is expected to accelerate. The foundation forecasts that the introduction of the national living wage will reduce the proportion of workers earning below the two-thirds threshold to 19% by However, the foundation indicated in its 2015 report that the proportion of the workforce earning below the 5 Resolution Foundation, Low Pay Britain, October

22 Living Wage, which responds much more directly to changes in the cost of living, will accelerate to 30% by The report goes on to demonstrate that the prevalence of low pay remains a particularly acute problem in the UK and even after the national living wage achieves its full rate in 2020, it is still anticipated that a greater proportion of UK employees will be classified as low paid by the earnings measure than the average across the EU nations. The Joseph Rowntree Foundation s measure of in-work poverty reinforces this picture, stating that that the number of UK workers in poverty leapt from 2.6m in 2013/14 to 3.8m in 2014/ Impact of inflation on real value of National Minimum Wage The graph below contrasts the path of the minimum wage rates with the path that they would have folllowed if they had kept pace with RPI inflation since Joseph Rowntree Foundation, Monitoring Poverty and Exclusion, December

23 8.00 Change in value of minimum wage rates Actual year old rate year old rate if kept pace with inflation Actual year old rate year old rate if kept pace with inflation Actual year old rate year old rate if kept pace with inflation The graph shows that the current real value of all rates for workers below the age of 25 is less than the value of the rate in If the value of the rate for 21-to-24-year-olds had kept pace with RPI inflation it would be worth 7.39 in Therefore, the national living wage rate of 7.50 does little more than restore the 2009 value for staff aged over 24. [Even if these figures are calculated on the basis of the Consumer Prices Index (which we believe consistently underestimates the actual inflation faced by workers), the value of the rates for 18-to-24-year-olds only returned to their 2009 value in 2015 and the 16-to-17-yearold rate only did so in 2016.] This means that the value of a full-time minimum wage salary has suffered annual falls in purchasing power in line with the graph below, based on a 35-hour week and RPI accumulated inflation rates since

24 1,400 Annual loss in value of pay packet for workers on minimum wage 1,200 1, Annual loss for year olds Annual loss for year olds Annual loss for year olds This year, the value of the rate applicable to 21-to-24-year-olds is still over 300 less than it was in 2009 for a worker on a 35-hour week full time job. The scale of the losses sustained by young workers has been even greater, with the 2016 wage of year-olds devalued by over 700. The cumulative impact of this devaluation since 2010 has been 4,122 for 21- to-24-year-olds, 5,807 for 18-to-20-year-olds and 4,561 for 16-to-17-year-olds. When the value of the National Minimum Wage is compared to house price growth, the contrast is particularly acute. The New Economics Foundation notes that, if the National Minimum Wage had grown since its introduction at the same pace as house prices it would now be over 40% higher than the government s national living wage - at more than 10 per hour... In London, the National Minimum Wage would be nearly 14 an hour - 90% higher than the current rate. Average UK house prices 7 are now almost 20 times the highest annual minimum wage rate and the average monthly rent for new tenancies in the UK 8 is over three times the highest weekly minimum wage rate (based on a 37-hour week). The geographical breakdown of these ratios is shown below. 7 Office for National Statistics, House Price Index Annual Tables, March HomeLet Rental Index, February

25 Ratio Ratio Ratio of house prices to minimum wage UK England London Northern Ireland Scotland Wales Ratio of average rent to minimum wage UK London Northern Ireland Scotland Wales 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 2016 figure at 17,100 for a single person and 18,900 each for a couple with two children, both working full-time 9. The foundation found that a couple with two children working full time on the national living wage fall 12% short of the MIS even after accounting for benefit payments, while a lone parent with one child falls 18% short. The MIS figures feed into the calculation of the Living Wage, which is announced every November by the Living Wage Foundation. In 2016, the rate for outside of London was set at 8.45 and the rate for London was set at 9.75 an hour. The 8.45 figure is a weighted composite of the wage needed by a variety of different household types. The hourly wage for different households ranges from 6.00 for a couple to for a lone parent with three children. 9 Joseph Rowntree Foundation, A Minimum Income Standard for the UK in 2016, July

26 Adoption of the Living Wage has expanded with astonishing rapidity 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. There are now in excess of 3,000 employers accredited as Living Wage employers by the Living Wage Foundation, a figure that has grown from around 200 just five 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 quarter 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 almost 2,000 a year short of the wage needed for a basic but acceptable standard of living Shortfall between highest National Minimum Wage and Living Wage It is also worth noting that, in April this year, the Living Wage Foundation published the results of a survey covering 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 has 10 : - 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%) 10 The proportion of employers supporting each finding is shown in brackets 26

27 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%) Trends 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. Calls have also gained traction across society over recent years for minimum rates to go beyond the Living Wage and guarantee a minimum rate of 10 per hour across the UK. The Labour Party has pledged to establish a minimum rate of 10 and the TUC has adopted the position since 2014 that the minimum wage should be raised to 10 as soon as possible. UNISON supports this target. 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. Looking at the period from 2015 to 2021, analysis by the Resolution Foundation 11 has found that benefit cuts are set to outweigh progressive wage growth associated with increases in the national living wage and the impact of planned further income tax cuts. 11 Resolution Foundation, Living Standards 2017, February

28 A further report from the foundation adds: Taken together, even adding in gains from free childcare hours and the development of the national living wage, this all means that by 2020 we can expect the poorest half of households to be worse off from combined tax and benefit changes announced this parliament. 12 This picture was reinforced by the Institute of Fiscal Studies 13 earlier this year when it reported that the total impact of the tax and benefit reforms implemented or planned for the period will result in an average annual reduction in income of close to 600, with the poorest three income groups losing in excess of 1,000, as set out in the graph below. 12 Resolution Foundation, The Government s 1bn tax and benefits giveaway will leave poorer households worse off, April Institute for Fiscal Studies, Personal Tax and Benefit Changes, March

29 Summary Conclusions The scale of low pay in the economy has remained steady at around one in five workers based on measurements linked to average earnings, but when calculated to take account of the cost of living, low pay has risen sharply and is set to continue that trend. The national living wage is set to improve the UK s position in comparison to other European countries, but low pay is set to remain a more widespread problem compared to the average among EU countries. Inflation has reduced the real value of all National Minimum Wage rates applying to staff under the age of 25 since The value of the rate applicable to yearolds is over 300 less than it was eight years ago. The devaluation suffered by year-olds is even greater, with their current wage now worth more than 700 less than seven years ago. 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 almost 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. The call for a minimum wage of 10 an hour has gained traction across the UK, with the Labour Party and TUC adopting policies for its attainment. UNISON supports this target. The combined impact of tax and welfare changes is expected to reduce the standard of living for low-income households over the next three years, even where households benefit from increases in the National Minimum Wage. 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 1 to this evidence shows how conversion can be achieved between the National Minimum Wage and the Living Wage) Major increases are needed in all National Minimum Wage rates applicable to workers aged under 25 simply to restore their real value to their 2009 level. For year-olds the required rise stands at 4.9%, for year-olds at 9.9% and for year-olds at 12.4%. 29