rose to move, That the Grand Committee do report to the House that it has considered the National Minimum Wage Regulations 1999 (Amendment) Regulations 2006.

The noble Lord said: I beg to move the Motion standing in my name on the Order Paper. I am pleased to present these regulations to the Committee today, which are primarily to implement the increased national minimum wage rates that come into effect on 1 October. The minimum wage has come a long way since its introduction in 1999 and remains one of the Government’s finest achievements. It has benefited many hundreds of thousands of people each year, particularly women, who make up two-thirds of those benefiting and is now widely supported by all sides of the House.

Before I speak to the detail of the regulations, it might be helpful to put them in context by saying a little bit about the independent Low Pay Commission’s remit last year. The Government asked the Low Pay Commission to consider whether the October 2006 uprating of the adult and development rates recommended in their 2005 report remained appropriate in the light of economic circumstances and other factors, andif not to make any recommendations for change. The remit also asked it to review the level of the rate for16 to17 year-olds, keeping in mind the position of the youth labour market and the incentives for the young to participate in education and training. Furthermore, the Government invited the Low Pay Commission to review the operation of the accommodation offset and, if appropriate, to make recommendations for any changes needed to the regulations. We were asked to review the treatment of benefits-in-kind, including where those benefits are offered as part of a salary sacrifice arrangement. The commission reported in March 2006 and the Government announced that they had accepted most of the recommendations.

I will now talk to each regulation in turn. Regulation 1 provides for the regulations to come into force on 1 October 2006, giving employers sufficient time to prepare and plan for the rate increases which were, of course, announced by the Government in March. Regulation 2 deals with increases to the minimum wage rates and the accommodation offset. The regulations increase the adult rate from £5.05 to £5.35, as recommended by the Low Pay Commission and accepted by the Government. That equates to an increase of nearly 6 per cent. The regulations also increase the development rate for workers aged 18-21 from £4.25 to £4.45 an hour, an increase of 4.7 per cent.

The commission also made a recommendation in respect of the 16 and 17 year-olds rate for 2006, recommending a 10 per cent increase from £3 to £3.30, to take into account the absence of any uprating in October 2005. In arriving at this decision, the commission looked at whether the introduction of a rate for 16 to 17 year-olds has encouraged young people out of full-time education or training. It concluded that it has not, nor has it damaged their prospects in the labour market. The Government recognise that in increasing the minimum wage they must be mindful of the economic conditions. They must ensure that the minimum wage is set at a level which avoids the risk of adverse effects on employment, inflation and the PSBR.

In short, the economic data indicate that these rates are sustainable. Employment continues to grow both in the overall economy and in the low paying sectors. Corporate profitability continued its cyclical improvement. The UK labour market remains healthy with high employment rates. Unemployment remains low. That is not just our view. It was the view of the Low Pay Commission, too. In its considerations, it looked at the low paying sectors, since any adverse employment effects of the minimum wage would be most evident in low paid sectors over and above the labour market as a whole. Employment in most of these sectors has continued to increase since the introduction of the minimum wage. Having said that, the Low Pay Commission stated that, in arriving at its decision, it recognised that there has been some divergence in economic outcomes.

While it supported the rate rises for 2006, it concluded that the phase in which the Low Pay Commission is committed to increases in the minimum wage above earnings is over, and furthermore makes no presumption that further increases above average earnings are required. We support this. As I have already said, the minimum wage is about protecting the vulnerable, while ensuring that the economy is not damaged. Additionally, the regulations will uprate the accommodation offset from £3.90 per day to £4.15 per day. That is the amount which can be taken into account when determining whether the minimum wage has been paid in situations where the employer provides a worker with accommodation, which is in line with the Low Pay Commission’s recommendation.

Regulation 3 contains some minor technical provisions. In addition, the Low Pay Commission recommended in its 2006 report that the accommodation offset provisions should continue to apply to all workers housed by their employer in all circumstances, and that the Government should update existing guidance and raise awareness. It also recommended that the Government should implement legislative measures to prevent employers using the device of a separate accommodation company to circumvent the restrictions imposed by the offset and, as a result, evade paying the national minimum wage.

We agree that the accommodation offset should apply in all situations in which employees are housed by their employers. However, legislative measures are not required since our legislation already covers a wide range of circumstances in which the employer provides accommodation to workers. We will issue draft guidance on when the accommodation offset is likely to apply and will embark on a consultation process with all interested parties, including the Low Pay Commission, to ensure that the guidance is sufficiently clear to meet needs.

Finally, last year we announced a new approach called “targeted enforcement”. The purpose is to target publicity and enforcement at key low-paying sectors in turn. As we stressed at the time we announced this approach—but I will stress again now—our purpose is not to tackle the great majority of good employers, but to tackle the minority of bad employers. This year's sector will be childcare nurseries. Her Majesty’s Revenue and Customs enforcement teams have found that one in three nurseries they have looked at have been paying less than the minimum wage. It is vital that we raise the perception of childcare as an attractive career option. As well as taking the action I am announcing today, the Government are also investing and legislating to ensure that childcare providers, including those in the private and voluntary sectors, can improve quality and give parents increased choice and confidence. We will therefore work with representative bodies, employers and employees in the nursery sector to identify the main issues, and produce appropriate guidance, which will be followed by an enforcement drive. That approach was successfully adopted last year in the hairdressing sector. I commend these regulations.

Moved, That the Grand Committee do report to the House that it has considered the National Minimum Wage Regulations 1999 (Amendment) Regulations 2006.—(Lord Sainsbury of Turville.)

I thank the Minister for explaining the effect of the regulations. The British workforce is among the most dedicated in the world, and we of course support the intent that our people have enough income to support themselves and their families, and to protect them from unfair discrimination by unscrupulous employers. We note however that the uplift in the minimum wage for adult workers in these regulations represents an increase of just over 5.9 per cent, which is considerably above the Government's inflation target.

Employers' organisations have expressed their increasing concerns, among other things, at the impact on the competitiveness of our companies. There was historically an intention to achieve a minimum wage above £5, which was achieved last year. The regulatory impact assessment states that it has not accounted for additional costs to employers as a result of what it calls the “uprating”. Presumably, that means that it has not contemplated the effect of successful pay claims by those above the minimum wage seeking to maintain their differentials. Given that these are likely to have a significant effect on many small businesses, especially those in the Midlands and the north, I would be grateful if the Minister would inform the Committee of his estimate of that effect.

I repeat my concerns voiced in the equivalent debate last year that some small businesses—I declare an interest as a shareholder of one, and need hardly say that they employ a sizeable proportion of the country’s workforce—employ a high proportion of lower paid workers, often operating at marginal rates of profitability. That gives rise to concerns, perhaps especially in the manufacturing and retail sectors, that if costs rise when profits are already wafer thin, redundancies are the only realistic option, thus often hitting the lowest paid hardest.

It is interesting to note that the Low Pay Commission’s report this year states that its review of economic conditions revealed some factors which could argue for a slight reduction in the October 2006 increase. It admitted, for instance, that subdued consumption spending had negative implications for the retail sector. It said that average earnings over the last year had increased somewhat less than they anticipated: that is, by 4.1 per cent and not 4.5 per cent. It acknowledged that forecasts for 2006 showed a similar shortfall, and admitted that the slowdown in average earnings growth appeared greater in the private sector, especially some parts of it. I look forward to hearing the Minister’s comments on these points.

As the Minister said, the Low Pay Commission’s 2006 report went on to say that it considered that the phase in which it is committed to increases in the minimum wage above average earnings is over. The Minister said that the Government support this. Will he go further, and undertake that the Government will not push forward increases next year at above the increase in average earnings?

There is a delicate balance between keeping inflation at an acceptable level and ensuring that workers are protected from unacceptably low levels of pay. I look forward to the Minister’s comments on these and other noble Lords’ points.

I am standing in for my noble friend Lord Razzall who is unfortunately unable to be here. I shall make some brief comments. We are, as a party, committed to narrowing the gap between the rich and the poor, rather than allowing it to spread. We recognise that the origin of Labour’s commitment to reintroduce the minimum wage was the failure of the wage councils under the previous Conservative Government to keep rates of pay in different sectors up with inflation.

We therefore welcome in principle this effort to introduce and maintain a floor. However, we wonder whether a national minimum wage is necessarily the way forward in the long term. Living between London and Yorkshire, and doing as much of my large item shopping in Yorkshire as I can because prices are a great deal lower there than in London—and rent and property cost a great deal less in Yorkshire than London—I am conscious that a minimum wage enabling you to live moderately well in Yorkshire hardly allows you to live at all in London. In its review of the future of the national minimum wage, are the Government now contemplating moving towards a greater geographical, and perhaps sectoral, variability?

It is clearly right that we carefully consider these changes to the minimum wage rate, since they obviously impact on workers and employers a great deal. I shall cover the points raised by noble Lords and give them reassurances.

The 6 per cent increase to £5.35 was the right approach. Six per cent is clearly more than the current average earnings of around 4 per cent, but the Commission found no strong evidence to support the contention that the minimum wage is damaging employment levels in low-paid sectors. As I said, there is a clear recognition that the period of substantial increases over the rate of inflation is probably coming to an end.

The noble Lord asked about the impact of the minimum wage on differentials. What the Low Pay Commission found in its 2005 report was that there is a concertina effect. In the years when the rate increase has been relatively large, businesses have narrowed the differentials and then restored them in the years when the increases have been smaller. It is therefore difficult to say precisely what the impact is, but one has to assume that if you move the minimum rate upwards, with some time lag it will affect differentials. That has to be taken into account when considering increases in costs.

On the point that employers’ organisations are saying that job losses will follow, the situation is that the UK labour market remains extremely healthy with high rates of employment and low unemployment. Of course, over the years since the first debates were held, people have argued that the national minimum wage would result in huge unemployment figures. We have not seen that, but it is absolutely key to continue to keep a close watch on the situation to make certain that we do not suffer impacts. We see this very much as a question of balancing all the time the need to retain a minimum wage while ensuring that it does not drive up unemployment.

So far as the retail sector is concerned, there has been a period of slack retail sales. However, in May, they were 1 per cent higher than in the preceding three months and up 2.1 per cent on a year earlier. Most forecasters are now predicting that we will see a pick-up in retail sales, so I do not think that there is any particular problem in that sector or, indeed, in other low-paying sectors. On the future, we are not in the business of making commitments. Our approach so far has been that we need to make judgments as we go along in the light of the circumstances at the time. We should not be saying that the minimum wage will be linked to the RPI or make other commitments.

The final question put to me concerned the suggestion to set regional rates rather than a national rate. This has always been an issue. One of the problems with it is that within regions themselves there is as much wage rate variation as there is between regions. I believe that going down that road would introduce an enormous amount of complexity that would become very difficult to manage. It is a case where we have to trade off exact fairness and economic efficiency against complexity. I think that we have reached the right position, which is to continue with a national rate. I accept that, as with any kind of national wage agreement, it means that those living in London experience considerable difficulties while a person on an island off the coast of Scotland might be keen on the relative wealth of the national minimum wage. However, it is necessary to trade complexity against equity.

I think that I have answered all the questions raised and I commend the regulations to the Committee.

On Question, Motion agreed to.

The Committee adjourned at eighteen minutes past six o’clock.