National Minimum Wage

Chapter 5
Setting the Rate
Introduction
5.1 We met to discuss and agree our recommendations in mid-January 2012. In this report, we
have therefore only considered data that were available up to 19 January 2012. That was
before the release of the first estimate of gross domestic product (GDP) growth in the fourth
quarter of 2011.
5.2 In making our recommendations, we have taken account of our understanding of the current
state of the economy (as laid out in Chapter 1); the impact of the minimum wage so far on
earnings, employment and competitiveness (as discussed in Chapter 2); the impact on young
people, interns and apprentices (as summarised in Chapter 3); and the operation of the
National Minimum Wage (NMW), including compliance and enforcement (as covered in
Chapter 4). We also consider the economic prospects over the coming year or so;
stakeholder views; other government legislation (including changes to the tax system and
pension arrangements); and international comparisons. As required in our remit, we consider
how business clarity might be improved. This chapter discusses these issues before setting
out our recommendations and their implications.
Economic Prospects
5.3 We first consider the prospects for the UK economy in 2012 and 2013. In arriving at our
recommendations for the minimum wage, it is important to consider future affordability to
the economy (and especially to the low-paying sectors and small firms) as well as the real
and relative levels of the minimum wage, that is, its real level (after taking account of
inflation) and its value relative to average earnings. In assessing future affordability, we look
at the prospects for growth in the economy as a whole and in the low-paying sectors in
particular. We then look at the prospects for inflation, pay settlements and earnings before
considering how employment might be affected.
Prospects for Growth
5.4 Throughout 2010 and much of 2011 independent forecasters expected growth in 2012 to be
around 2.0-2.5 per cent, as shown in Figure 5.1. The economy was expected to continue its
recovery from the deepest recession since at least the 1930s. However, as we discussed in
Chapter 1, the economy performed weakly in 2011 after relatively strong growth in the first
three quarters of 2010. But it wasn’t until the late summer of 2011 that sentiment changed
noticeably and since then there have been large downward revisions of projected GDP
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