UNISON evidence to the Low Pay Commission on minimum wage rates for 2019

Transcription

1 UNISON evidence to the Low Pay Commission on minimum wage rates for 2019 June 2018

2 CONTENTS INTRODUCTION SUMMARY OF RECOMMENDATIONS EXECUTIVE SUMMARY GENERAL ECONOMIC CONTEXT Economic growth Unemployment and turnover rates The cost of living Pay settlement and average earnings Operating surpluses FACTORS AFFECTING LOW INCOME GROUPS Scale of low pay in the UK Employment, vacancy and profit rates in low-pay sectors Spread of the Living Wage and contrast to NMW Impact of tax and benefit changes FACTORS AFFECTING PUBLIC SERVICE WORKERS Broad pattern of low pay in public services Low pay by sector FACTORS AFFECTING YOUNG WORKERS AND APPRENTICES Injustice of youth rates recognised by most employers Employment and wage rates among young workers Impact of inflation on value of youth rates Apprentice rate risks 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 Naming and Shaming Sleep-in shift back payments Payslip changes Problems with payslip records Other suggested actions APPENDIX 1 Employment growth rates by occupation APPENDIX 2 - 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 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 4

5 the employer to self-correct. These employers should then be named and shamed for all the arrears that they owe their whole workforce. o o o 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. 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. 5

6 2. 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 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 The Bank of England forecasts that pay settlements will average 3.1% in 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 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. 6

7 Factors 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 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

8 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. 8

9 Factors 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 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 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 year-olds the required rise is in the order of 6.8%, for year-olds it is 11.1% and for year-olds it is 15.2%. 9

10 Wider economic factors Summary Conclusions Operating surpluses and shareholder dividends have 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. 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. 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

11 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 11

12 cover 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. 12

13 GDP ( million) 3 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 recommendations 1. This continued the pattern from 2016, when forecasts influenced by the vote to leave the European Union proved overly pessimistic. 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 1.5% in 2018, before dipping to 1.3% over 2019 and 2020, then rising to 1.4% in 2021 and 1.5% in 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 HM Treasury, Forecasts for the UK Economy, July Office for Budgetary Responsibility, Economic and Fiscal Outlook, March HM Treasury, Forecasts for the UK Economy, May

14 Percentage annual increase GDP forecast 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 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 years 4. 4 HM Treasury, Forecasts for the UK Economy, May

15 Sep 11 Dec-11 Mar-12 Jun-12 Sep-12 Dec-12 Mar-13 Jun-13 Sep-13 Dec-13 Mar-14 Jun-14 Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17 Dec-17 Mar-18 % change over 12 months Percentage Forecast unemployment rate 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 Year / Month Source: Office for National Statistics, UK Consumer Price Inflation: April 2018, published May

16 % increase Between 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 prices Bus & coach fares Rail fares Electricity Gas Price rise % 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 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

17 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 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, 17

18 % annual growth 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 2.6% 5 and the Bank of England forecasts that pay settlements will average 3.1% over 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 However, the uncertainty in these figures is reflected in the OBR s forecasts for average earnings growth in 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 Forecast average earnings growth Source: Office for Budgetary Responsibility, Economic and Fiscal Outlook, March Labour Research Department, Payline Database 6 Bank Of England, Agents Summary Of Business Conditions, February

19 Growth rate 3.5 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%. 35.0% 30.0% 25.0% Growth in operating surpluses 29.9% 23.2% 20.0% 15.0% 10.0% 5.0% 3.6% 4.3% Change 2010 to 2017 Change 2016 to % Gross operating surplus Compensation of employees Source: Office for National Statistics, Second Estimate of GDP, Quarter Q4 (Oct to Dec) 19

20 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 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 The Bank of England forecasts that pay settlements will average 3.1% in 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 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. 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 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 Britain 7 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

22 continue, pushing the proportion down to 16.2% by 2020, though that would still mean that 4.3 million workers remain below the lowpay 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 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. USA Korea Canada Great Britain Germany OECD Greece Austria Portugal New Zealand Low pay across countries % workers on wages less than two-thirds median earnings Source: 22

23 Though 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 below 8. 8 Resolution Foundation, The Minimum Required? Minimum Wages and the Self Employed, July

24 Their 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 occupations 9 indicates that employment growth remained positive in the year to June 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, Office for National Statistics, Employment by Occupation, August Chartered Institute of Personnel Development, Labour Market Outlook, Winter Office for National Statistics, Labour Market Statistics, March

25 All vacancies Mining & quarrying Manufacturing Electricity, gas, steam & air conditioning supply Water supply, sewerage, waste & remediation Construction Wholesale & retail trade; repair of motor vehicles Transport & storage Accomodation & food service activities Information & communication Financial & insurance activities Real estate activities Professional scientific & technical activities Administra-tive & support service activities Public admin & defence; compulsory social security Education Human health & social work activities Arts, entertainment & recreation Other service activities Total services Motor Trades Wholesale Retail Percentage 5.0 Vacancy rates 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 lowpaid staff, yet its surplus growth rate of 27.8% outpaces the economy average of 24.3%. 25

26 Growth 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-time 13. 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 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 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

27 There 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 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 has 14 : - 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 27

28 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. 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 inwork 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 Resolution Foundation, Freshly Squeezed, November

29 The 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 Joseph Rowntree Foundation, Living standards squeeze tightens despite pay rises and tax cuts, July

30 30

31 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 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. 31

32 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 preventing the bogus classification of workers as self-employed and extend the employment rights of workers. 32

33 5. FACTORS AFFECTING PUBLIC SERVICE WORKERS This chapter seeks to provide a broad indication of the scale of low pay across public services, the response of public sector employers to the national living wage and the implications of the 2020 target. The part of public services where National Minimum Wage rates affect the largest section of workers are in privatised areas such as social care and facilities management functions covering cleaning, catering and security. This sector is not subject to the same level of stringent data collection as the public sector, but where evidence is available we set it out below. 5.1 Broad pattern of low pay in public services Among the principal public sector bargaining groups where UNISON represents members, the table below shows the lowest rate within each group and the percentage uplift required to reach the 8.20 hourly rate estimated for 2019 to follow a straight path toward the 2020 target national living wage rate UNISON bargaining groups From Rate ( ) Hourly ( )* Annual uplift to reach 8.20 NLW by April 2019 Local government (England, Wales & 01/04/ None Northern Ireland) Local Government (Scotland)*** 01/04/ None NHS Agenda for Change (England)** 01/04/ None NHS Agenda for Change (Scotland)*** 01/04/ None NHS Agenda for Change (Wales)*** 01/04/ None NHS Agenda for Change (Northern 01/04/ % Ireland) Higher education 01/08/ % Further education (England) 01/08/ % Further education (Scotland) 01/08/ None Sixth Form College support staff (England 01/09/ % & Wales) Police staff (England & Wales)** 01/09/ None Probation Service 01/04/ % Youth and Community Workers 01/09/ % * The hourly rate is based on a 37-hour week, with the exception of the NHS, which has a standard 37.5-hour week ** The NHS Agenda for Change (England) and Police staff (England & Wales) figures quoted here are those contained in the current pay offer and have not yet reached settlement *** Scotland pays the Living Wage across the public sector and Wales does so in the NHS and FE colleges. Many employers meet the requirement through a supplement to the pay scale. Across all bargaining groups the average annual increase required is just 1.5%. The table shows that seven bargaining groups already pay in excess of the 2019 target rate, including the largest bargaining groups in local government NJC and NHS Agenda for Change (England), if the latter is settled in line with the current offer. Significant increases are mostly isolated to certain pockets of the public sector where particular circumstances have led to a virtual freezing of rates, such as Northern Ireland during the extended period without a 33

34 government in place and the National Probation Service (NPS), where large scale privatisation has been the background to paralysis of the NPS pay scale since Almost all parts of the public sector apply their bottom rate to staff regardless of age. Therefore, the youth rates are hardly utilised, though the apprentice rate is adopted by many of the bargaining groups as a separate rate outside the pay scale. Across the public sector, the Living Wage has been incorporated into the following national and framework agreements: The Scotland government has established the Living Wage within all its public sector organisations and across the social care sector; Minimum rates have been raised to the Living Wage in the Wales NHS, Wales Further Education Colleges and universities across the UK (for staff on a 35-hour week); Framework agreements for support staff in more than 12,000 schools across the UK set the Living Wage as a key target. If the NHS Agenda for Change (England) pay offer for 2018 is accepted, the bottom rate will be taken above the Living Wage. Given the scale of the numbers affected in the NHS, this will represent a major step change in adoption of the Living Wage across the public sector. Last year we estimated that 163,466 workers, or 7.1% of the public sector workforce, across local government, health and education (except for schools) were paid below the Living Wage. If the Agenda for Change offer is settled in its current format, this figure would drop to 55,292, or 2.4% of the workforce. Even where national agreements have not set a Living Wage minimum, a substantial proportion of individual councils, NHS trusts, schools and academies have taken up the Living Wage on their own initiative. A UNISON Freedom of Information survey covering local government, the NHS, universities, further education colleges and police authorities that drew over 900 responses found that 51% of employers across these sectors already pay at least the Living Wage to their lowest paid directly employed staff. The proportion of public authorities that paid the Living Wage within each sector at the time of the 2015 survey is shown below. Local Government NHS Trusts Universities FE Colleges Sixth Form Colleges Police Forces 55% 28% 70% 56% 33% 100% The upshot of all these developments is that low pay remains a significant issue in the public sector, but Living Wage agreements mean that the issue is becoming ever more concentrated in those parts of public services that have been outsourced to the private or voluntary sector. 5.2 Low pay by sector Local government For a long period, local government has been one of the parts of the public sector where low pay remains most prevalent. It is estimated that 34,958 workers by headcount or 15,163 34

35 workers based on full-time equivalents (FTE) will be paid less than the Living Wage following implementation of the 2018 pay offer accepted by UNISON. This equates to around 6.1% by headcount and 3.4% of the NJC local government workforce, covering England, Wales and Northern Ireland 17. The 2018 pay settlement would bring the lowest NJC rate to 8.50 an hour, leaving negligible increases required to bring 12,847 affected workers up to the national living wage by Pay point Hourly rate % increase in salary per year to reach 2020 NLW Cumulative estimated total FTE on pay point Cumulative estimated total headcount on pay point % 3,485 8, % 5,236 12, % 7,931 19, % 10,720 25, % 15,162 34,958 *A further 14,995FTE workers are estimated to be paid the Living Wage through local adjustment of the pay scale or local supplements Source for workforce numbers: UNISON Freedom of Information requests to all local authorities in England, Wales and Northern Ireland. The figures do not cover the schools workforce. Our best approximation is that schools would a further third to the totals. The increase means that employers are taking on a 9.3% increase for their lowest paid staff in The local government workforce contains a high proportion of groups that are frequently afflicted with low pay. Over three-quarters of the workforce are women, many of whom are single mothers or in low-paid households in which their incomes are vital to the wellbeing of their children and families. In addition, over 50% of the workforce is made up of part-time staff, working regular unpaid overtime. As well as the directly employed local government workforce, a vast number of jobs lie in private and voluntary organisations delivering public services. Among the most problematic in terms of low pay is adult social care, which is estimated to employ 1.2 million workers in front line care across the UK. The average wage for the sector s care workers employed by the public sector is 9.73, but in the independent sector the average wage stood at 7.76 an hour between April 2016 and March Therefore, a 2.6% annual increase is required over four years to reach the 2020 national living wage rate, which is just 0.1% above average earnings growth expected across the economy over the period. Estimated independent sector care worker workforce 639,600 Average independent sector care worker hourly wage in 2016/ Estimated hourly NLW rate by % increase required to reach NLW 10% Annual % increase required to reach NLW 2.6% Source for workforce data: Skills for Care, The State of the Adult Social Care Sector and Workforce in England, September 2017 The Joseph Rowntree Foundation s detailed analysis of the sector found that 72% of staff engaged in home care are paid below the Living Wage and an occupational breakdown 17 The local government workforce in Scotland covered by the SJC receives the Living Wage as a minimum 35

36 reveals that sub Living Wage rates go to 52% of senior care workers, 78% of care workers and 85% of ancillary workers 18. A more up-to-date survey conducted among home care workers by UNISON last year returned similar results - 71% were on wages below the Living Wage outside London and 91% were on wages below the Living Wage in London. The scale of low pay in the sector goes hand in hand with the Joseph Rowntree Foundation s further findings that almost two out of every three care workers in post during 2010 had left by The inadequacy of wages for retaining staff was then further exposed by Skills for Care in its 2017 report, which found that turnover has grown 4.7 percentage points since 2012/13 to reach 27.8%. Among solely care workers, the turnover rate has hit 33.8%. Skills for Care also uncovered the clear relationship between pay and turnover, with the highest turnover rates recorded among workers on or just above the then prevailing national living wage and the rate dropping markedly to levels in line with national averages for workers on pay in line with the real Living Wage 19, as set out in the graph below. Skills for Care reported that the number of jobs in adult social care grew 19% (255,000 jobs) between 2009 and Against that background, jobs growth slowed between 2015 and 2016 (when the national living wage was introduced) but it still rose by 1.5% (20,000 jobs) The estimated wage bill across the sector also shows that over the first full year when the national living wage was payable costs increased slightly quicker than in the previous year but were not out of line with the longer term general growth trend. 18 Joseph Rowntree Foundation, The costs and benefits of paying all the lowest paid care home workers in the UK the Living Wage, Skills for Care, The State of the Adult Social Care Sector and Workforce in England, September