ce Management In Context Assignment One: National Minim

HUMAN RESOURCE MANAGEMENT

IN A CONTEXT
CONTENTS PAGE

Cover Page 1

Contents Page 2

Evaluation of the National Minimum Wage 3

Appendix 10

Abbreviations 11

Bibliography 12
 Human Resource Management In Context Assignment One: National
Minimum Wage
Q2. The National Minimum Wage is an example of an attempt to regulate the labour
market. Some Economists believe such regulation leads to increase in unemployment
and inflation.

Critically evaluate if this attempts at regulation does have adverse effects or whether
as some believe the National Minimum Wage increases employment.

The Labour party’s objective was to use a National Minimum Wage (NMW) to help reduce
poverty and income inequality and became effective on 1st April 1999. The NMW rates
are expressed as national hourly rates and there are no variations by region, occupation,
industry or even employer size. The government was very wary of the potential adverse
economic effects and required the LPC to "… have regard to ... the likely effect on the
level of employment and inflation..."1

Using the assumption of the competitive labour market, wage levels are determined by
factors such as inflation and unemployment in such a way that the supply of and demand
for labour correspond to a set a ‘labour market clearing wage’.

Figure 1 is an illustration providing a breakdown of the number of employees aged 22+

and their hourly pay.2

Figure 1: Hourly Earnings Distribution for Employees Aged 22 and Over, UK, 2007

Figure 1 illustrates that around 5.2% of jobs (1.196 million) held by those aged 22+ were
paid below the forthcoming October 2007 minimum wage of £5.52. This total was made
1 Low Pay Commission, 1998, p. 13, paragraph. 1.2
2 Source: LPC estimates based on ASHE 2007 methodology, low-pay weights, UK, April 2007.

BA Business Studies 3
up of around 1% of jobs (231,000), which paid below £5.35, the NMW in April 2007.
About 2.4% of jobs held by adults (565,000) were paid at the NMW. A further 400,000
jobs were paid above the £5.35 NMW but below the forthcoming rate (£5.52).

Up until the mid-1980s, the TUC had been against a minimum wage because they felt it
might damage collective bargaining. In 1995 a former Conservative government
minister, Iain Lang said that a minimum wage set at £4.15 an hour would cost at least
950,000 jobs.3 If anyone had stood to lose their jobs as a result of the NMW, it would
have been workers in marginal low-productivity sectors of the economy.

Figure 2 provides a breakdown of the number of jobs in each industry-defined low-paying

sectors and the proportion of those that are paid at or below the NMW and those that will
be affected by the NMW.

Figure 2 Number of Jobs and the Proportion of Minimum Wage Jobs in Each Low-paying Sector, GB,
2007. 4

The economic debate over the necessity and desirability of a NMW has centred on its
likely consequences for pay and unemployment. The neoclassical competitive market
model 5 contends that unless the NMW is set at the market clearing rate, then either it
will have no effect when set below the equilibrium or will lead to unemployment when set
above it. The orthodox economic assumption was by paying more for staff than the

3 The Independent, 13th September 1995.

4 Source: ONS employee jobs series, not seasonally adjusted, GB, September 2007 and ONS Annual Survey of
Hours and Earnings (ASHE) 2007 methodology, low-pay weights, UK, April 2007.
5 Simpson & Paterson, 1992
 Human Resource Management In Context Assignment One: National
Minimum Wage

market rate would lead to employers to cut jobs. Prior to the NMW’s introduction, many
economists were predicting that it would cost 80,000 jobs over it first three years.

Classical Economic theory predicts that an increase in the NMW should lead to
unemployment. If the minimum wage (WTU) is placed above the equilibrium (we),
demand for labour falls, creating unemployment of Q2 – Q1.6

If labour markets are competitive then minimum wages could cause unemployment. A
minimum wage can cause cost-push inflation. This is because firms face an increase in
costs, which are likely to be passed onto the consumers, this is more likely if the wage
differentials are maintained. A minimum wage may increase the number of people
working on the black market. Two things are clear from economic theory, firstly by
raising the wages of low paid workers can affect a number of economic variables,
principle among which are employment, prices, productivity and profits. The second
implication is that the level at which the minimum wage is set is crucial to the magnitude
of those economic effects and to the scale of any negative impact.

Employers might react to an increase in the NMW by maintaining the same number of
employees but reducing their hours, trying to avoid the high level of staff turnover or
redundancies to absorb the effect of the NMW. The ACS7 say many retailers had been
forced to reduce hours worked by employees, with some trying to offset NMW costs by
employing staff for less than 16 hours to reduce the NIC.

Firms will have an incentive to raise the productivity of employees if they must pay the
minimum wage. This may lead to increased investment in the human capital of the
workforce. This would occur by firms monitoring employees more closely, motivating
them to put in extra effort as a result of higher pay, substituting capital for labour or
trying to improve the quality of their new technology and work force (training).
6 Anderton, Alain - Economics, Causeway Press, Fourth Edition, 2006
7 ACS = The Association of Convenience Stores - National Minimum Wage, Low Pay Commission Report 2008 –
www.lowpay.gov.uk

BA Business Studies 5
Figure 3: The Growth in Productivity for the Whole Economy, Total Services & Distribution
(including Retail & Hospitality), UK, 1998 – 2007.8

FSB Employment Surveys9 found for affected businesses, the main impact of the NMW
was reduced profit margins. Firms might try and absorb the costs of NMW increases by
accepting a squeeze on their profit margins. If these firms were earning excessive profits
this wouldn’t have an adverse economic effect, but where firms are earning normal
profits, this position cannot be sustained in the long-run.

Firms, who employ NMW workers, now pass this extra cost by raising the prices of their
products to sustain the similar levels of profit margins prior to the NMW law. ACS10
claimed continued increases in the NMW are a key reason for reduced profits and
decreased competitiveness. The BRC11 claim the productivity in retail had increased, but
additional revenue generated by employees had heavily outweighed by increased cost
pressures, including wage inflation.

The CBI was concerned that any increase in the NMW above average earnings would
contribute to the ‘pull’ of the informal economy, especially of the marginal tax rate
employees faced. Salary sacrifices are attractive to an employer as they offer savings
through reduced employer NICs. This can be attractive for employers operating in a tight
labour market. Ram, Edwards & Jones 2004 claims a worker might accept pay below the
NMW rate in order to remain eligible for working tax credits while receiving some wages
on a “cash in hand” basis as earnings rise, people pay more in income tax and NICs.

8 Source: ONS, output per job for the whole economy (ONS code LNNP) and experimental series for total
services (ONS code GGSJ) and distribution, hotels and catering (ONS code GGSM), quarterly, seasonally
adjusted, UK, 1998 - 2007.

9 Federation of Small Business - - National Minimum Wage, Low Pay Commission Report 2008 –
www.lowpay.gov.uk
10 The Association of Convenience Stores - National Minimum Wage, Low Pay Commission Report 2008 –
www.lowpay.gov.uk
11 BRC =British Retail Consortium, Low Pay Commission 2008
 Human Resource Management In Context Assignment One: National
Minimum Wage

NMW can have an impact on business investment, as any squeeze on profits is likely to
impair the ability of businesses to invest. In retail, the BRC 2007 survey results
suggested the rise in NMW cost the retail industry over £1.7 billion. The IRC12 also
reported that independent retailers were finding it increasingly difficult to accommodate
NMW increases. Ethnic minority groups are disproportionately represented among low
paid workers. If there were a negative employment effect for the low paid, we can expect
a rise in the number of people unemployed from these ethnic groups.

Employment has continued to grow strongly since the introduction of the minimum wage,
and there were no discernible adverse effects at the aggregate level. In fact, total
employment increased significantly during the first two years after the introduction of the
NMW. The LPC13 claimed the rate of unemployment stood at 5.3% in the final quarter of
2000. These aggregate unemployment data strongly suggested that the UK labour
market was not adversely affected by the introduction of the NMW, if anything there has
been a positive effect.

If there were a negative employment effect resulting from the NMW, one would expect a
rise in unemployment in lower-paid regions. But this wasn’t the case, in-fact the lowest
paying region, the North-East, had the largest increase in employment. The labour
market trends for youth, ethnic groups, disabled people and workers in low-paid regions
are consistent with the view that the introduction of the NMW had a small positive impact
for some low wage groups.

The NMW definitely didn’t cause these reductions in unemployment, but other factors
such as retraining and other help the Government provided to disadvantaged groups in
order to find employment. The government has introduced a number of “New Deals” to
help young people and the long-term unemployed get jobs over the last few years. It also
made changes to the system of social security benefits, in order to discourage
unemployment. These changes probably help explain the good employment outcomes
for low-paid workers in recent years.

For many employees in receipt of in-work benefits, the NMW will not only substantially
increase their earnings, but also increase their total income. This would support the idea
that the NMW would have boosted consumption, aggregate demand and employment.
State benefits would cost less and this little need for benefit "top-ups" such as income
support and council tax benefit, because those in work who are directly affected will see
their gross weekly earnings rise.

The NMW in the diagram Figure 4 is set above the normal free market wage rate for a
given occupation. Total employment contracts from E1 to E2 (representing a loss of
earnings for those who lose their jobs). At E2, there is a rise in the earnings of those who
remain in work. If labour demand is inelastic and the scale of job losses arising from the
NMW is small, then total earnings to low paid workers should increase.

Figure 4: Showing the potential earnings from the NMW

12 IRC = Independent Retailers Confederation, Low Pay Commission 2008

13 Low Pay Commission third report in March 2001

BA Business Studies 7
Against the classic economic theory stands the Monopsony model of the labour market.
Due to lack of competition on the demand side, a single/group employer is able to control
wages. However, wages are lower than in a competitive market and can be raised
without adverse employment effects, instead it would increase with NMW imposed14.

In the diagram below we see an increase in aggregate demand leading to an expansion

of aggregate supply. Because of the increase in demand for output, the demand for
labour at each wage rate will grow - leading to an increase in total employment.

In any economy, employment levels are determined by many factors. Wages, because
they are a major component of labour costs, are clearly one important factor. The levels
of aggregate demand, productivity and labour skills, plus changes in the costs of other
factors of production, will also have an impact on employment levels.

The government, business, unions and academics all now share the view that there has
been no significant adverse impact resulting from the statutory wage floor. The

14 Begg, Fischer & Dornbusch, 2005, pp. 39, 40 & 178; Lipsey & Chrystal, 2004, pp. 277-278; Sloman &
Sutcliffe, 2003, pp. 264-265, Box 10.3.
 Human Resource Management In Context Assignment One: National
Minimum Wage

information concerning improvements in recruitment, retention and worker motivation

after the NMW was introduced would suggest that paying wages at about the market
clearing rate can make good economic sense, because it encourages higher productivity.

When setting the National Minimum Wage in the UK we have sought to set it at a level
that minimises any harmful outcome. Our focus has been firmly on ensuring limited
adverse effects on employment and the evidence to date suggests that the strategy has
been successful so far.

Research found that pay structures had changed as a result of the NMW and that
differentials had been squeezed but still found little impact on employment. Indeed,
employment in the UK was at record levels with unemployment falling. The number of
employee jobs in the low-paying sectors grew marginally faster than in the economy as a
whole. Though, firms may have passed on the costs of the NMW to their customers in the
form of higher prices. Profits, however, appeared to increase across the economy and
productivity had increased faster in retail and hospitality than in the whole economy.

There have been no major negative employment effects for the low-paid as a result of
the NMW in the UK. While the minimum wage covers 1.5 million workers, it is too early
to assess its impact on employment although, as yet, there are no discernible adverse
effects.

APPENDIX
FIGURE 1

Source: ONS employee jobs series, not seasonally adjusted, GB, September 2007
and ONS Annual Survey of Hours and Earnings (ASHE) 2007 methodology, low-
pay weights, UK, April 2007.

BA Business Studies 9
Note: Figures in parentheses are the proportion of jobs in April 2007 that paid below the down rated value of the
forthcoming minimum wage (£5.52 in October 2007). That is, adult jobs paying below £5.40, jobs for 18–21 year
olds paying less than £4.50 and jobs for 16–17 year olds paying less than £3.32.

Figure 3

The Growth in Productivity for the Whole Economy, Total Services and Distribution
(including Retail and Hospitality), UK, 1998 – 2007.15

Official data from ONS show that productivity has been increasing in the economy as a whole since the third quarter of
2005. Figure 3 shows that productivity in the service sector increased at a slightly faster pace than for the economy as
a whole. Although this series is not available for the low-paying sectors, it is available for the distribution sector, of
which retail and hospitality are large components. We can see that productivity in the distribution sector has risen
even faster than in the service sector throughout 2006 and 2007.

ABBREVIATIONS
ACS – Associations of Convenience Stores

BRC – British Retail Consortium

CBI – Confederation of British Industry

FSB – Federation of Small Business

IRC – Independent Retailers Confederation

LPC – Low Pay Commission

15 Source: ONS, output per job for the whole economy (ONS code LNNP) and experimental series for total
services (ONS code GGSJ) and distribution, hotels and catering (ONS code GGSM), quarterly, seasonally
adjusted, UK, 1998 - 2007.
 Human Resource Management In Context Assignment One: National
Minimum Wage

NIC – National Insurance Contributions

NMW – National Minimum Wage

TUC - Trades Unions Congress

BIBLIOGRAPHY
TVU Lecture Notes, Alex Mitchell, September 2008

National Minimum Wage, Low Pay Commission Report 2008 – www.lowpay.gov.uk

National Minimum Wage, Low Pay Commission Report 2006 – www.lowpay.gov.uk

The National Minimum Wage, The Story So Far, Second Report of the Low Pay
Commission

Employment Law for Business Studies, Janice Nairns, Financial Times, Pitman Publishing
1999

Human Resource Management, A Contemporary Approach, 4th Edition, Beardwell, Holden,

BA Business Studies 11
Claydon, Prentice Hall, Financial Times, 2004

Introduction to Human Resources Management, A Guide to Personnel in Practice, Donald

Currie, CIPD, 2006

Employment Relations, Ed Rose, Financial Times, Prentice Hall, 2001

Anderton, Alain - Economics, Causeway Press, Fourth Edition, 2006

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