National Minimum Wage

Impact on Earnings and Pay
Chapter 2: The Impact of the National Minimum Wage
2.18 We start by investigating the impact of the minimum wage on earnings. If the minimum
wage had been set at a level such that it did not affect the distribution of earnings or
companies’ pay structures, it is unlikely to have had any effect at all. This, however, does not
appear to be the case.
2.19 In order to assess the impact of the minimum wage on earnings, we focus our analysis on
ASHE, which ONS considers the best source of earnings information. However, it is only
conducted once a year, in April, and the results are not then available until about six months
afterwards. Hence, we use Average Weekly Earnings (AWE) as a more timely measure of
earnings in the economy and available at some degree of disaggregation, such as public and
private sector, manufacturing and services, and industry (at the one digit Standard Industrial
Classification).
National Minimum Wage Relative to Prices and Earnings
2.20 Since its introduction in April 1999, the adult rate of the NMW has increased by 69 per cent
from £3.60 an hour to £6.08 an hour in October 2011. Figure 2.5 shows that this is much
faster than the growth in average earnings, inflation (whether measured using the Consumer
Prices Index (CPI) or the Retail Prices Index (RPI)) or the economy. Between April 1999 and
October 2011, average earnings including bonuses (measured using a combination of the
Average Earnings Index (AEI) and AWE) grew by around 55 per cent, RPI inflation rose by
44 per cent and CPI inflation by 31 per cent.
2.21 Had the initial adult rate of the minimum wage been uprated in line with average earnings
growth, it would only have been £5.60 an hour by October 2011, 48 pence below its current
level. If instead, it had been increased in line with price inflation, it would have been £4.71
using consumer prices and £5.19 using retail prices. These are respectively £1.37 and 89
pence less than the current adult rate of the minimum wage. It is evident, therefore, that the
adult rate of the minimum wage has increased its relative value (compared with average
earnings) as well as its real value (compared with price inflation) since its introduction. In
contrast, nominal gross domestic product (GDP) grew by 67 per cent between the first
quarter of 1999 and the third quarter of 2011, roughly in line with the increase in the
minimum wage.
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