National Living Wage

The National Living Wage (NLW) was introduced on April 1st of this year, and applies to all those over the age of 25. The NLW, or National Minimum Wage Premium to give it its formal title, is £7.20 p/h for those over the age of 25, while for those aged 21 to 25, £6.70 and for those 18 to 21, £5.30.  

The objective of the NLW is to raise the minimum figure that employees can earn in line with a percentage of the average hourly salary of a worker over the age of 25. When the National Minimum Wage was introduced in the early 2000s, it was introduced at 45% of an average hourly rate. The NLW has been introduced at a higher rate; closer to 55%. The Government have been clear that they expect for the NLW to continue to rise over the course of this Parliament, aiming for £9 p/h by 2020. 

The introduction of the NLW is expected to affect some 2.7m individuals, and as of April they will have seen a difference in their pay packets. While this is great news for those that are receiving the pay rise, it will also have an impact on the businesses and employers that have to pay the increased rate.  

Some businesses may not be able to navigate their way through this period of choppy waters, others will decide that restructuring is required in order to balance the books

As yet, there is little evidence whether those 2.7m; in addition to the 750,000 who are expected to move from the National Minimum Wage to the National Living Wage by 2020, will become more productive in the workplace. Experts agree that for the NLW to be a success, productivity – which is currently low in the UK compared to European counterparts – needs to pick up and drive real growth within the UK economy.  

Productivity in the UK

One of the frequently mooted problems with the NLW is although it is fantastic that so many people will receive a pay rise; it is to be paid for by business with no guarantee that they will receive a better quality workforce. A survey by the Resolution Foundation and the Chartered Institute for Personnel and Development found that 54% of employers felt that the NLW would affect their staffing bills, with 18% saying it would seriously affect them.  

Other research conducted in the months running up to the introduction of the NLW has suggested that the benefits felt by employers as well as employees will outweigh any financial considerations. Improving employee’s salaries can improve staff turnover and retention, and lower absence rates, all pointing to a heightened level of employee engagement. 80% of employers felt their staff delivered better quality of work after paying them the Living Wage, with 75% of employees agreeing that their work was improved. This could, by itself, pay for the introduction of the NLW.  

The NLW has however, been set at an arbitrary rate. The National Minimum Wage is set by the Low Pay Commission, and set at a considerably lower rate. The Low Pay Commission however was not consulted on the new NLW, which still falls considerably short of what the Living Wage Foundation considers to be a ‘genuine’ living wage. They calculate this figure to be £8.25 outside of London and £9.40 within London. 

That said, it has been calculated the National Living Wage will result in just a 0.1% increase in compensation across the economy, suggesting the onus on employers is not insurmountable.  

Real People and Real Benefits

It is worth stating for those now earning the NLW, the benefits are real and can make a profound impact to their livelihoods. The increase in pay for those on the lowest salaries in the UK means that the effects of poverty can be alleviated where it is felt, and those that are not currently in the labour market will be encouraged to find a job through the prospect of more money.  

Research conducted in the months running up to the introduction of the NLW has suggested that the benefits felt by employers as well as employees will outweigh any financial considerations

There has been a mix in forecasts speculating as to the difficulties or otherwise of the impact of the NLW on business. Those in low margin, high headcount organisations could potentially see increases in their salary bill. Industries such as hotels and catering; leisure; wholesale outlets and retail have been pinpointed as the type of business who could suffer the most detrimental impacts.  

Costs to Business

One recent report suggested the retail sector, where one fifth of workers earn the NLW, will need to commit £3bn every year to pay for it. Further research from the British Retail Consortium stated that one third of the 3m people employed within the retail sector could lose their jobs as a result of costs incurred.  The CIPD similarly reported that the number of vacancies in the retail sector is expected to fall to its lowest figure since 2011, while one third of retailers are trying to limit new staffing costs as they mitigate the effects of NLW.  

Of particular interest is data from the ONS, which illustrates how it will impact predominantly smaller businesses, with the vast majority of those paying below NLW rates prior to April 1st being micro businesses or SMEs.  

A Danger to Jobs?

That being the case, is there then the danger jobs might actually be put in danger as a result of the NLW? Very possibly. We have already seen some anecdotal evidence begin to filter through in the few short months since the NLW was launched. Caffé Nero, which had until now offered complementary food and drink to all staff has begun charging for it for the first time – albeit at a heavily discounted rate. B&Q, Tesco and Next have all reportedly slashed overtime and benefits to staff. In some instances, this may actually involve individuals within some firms receiving a reduction in pay once the overtime and loss of benefits have been factored in.  

The implications of the introduction of NLW could have pronounced knock-on effects. As well as some businesses who may not be able to navigate their way through this period of choppy waters, others will decide that restructuring is required in order to balance the books.  

Industries such as hotels and catering; leisure; wholesale outlets and retail have been pinpointed as the type of business who could suffer the most detrimental impacts

Of course, firms also have the option of passing on increased costs to their customers, and it may be the case in the near future that we see price rises in certain sectors that are linked to the introduction of the NLW.  

Many of the types of businesses that will be impacted by NLW work in labour intensive markets; ie, they tend to have relatively low profit margins and high volumes of employees, as you might expect to see in a retail outlet. Due to the make-up of these businesses, it is not possible to substitute labour for capital investments that might help to negate the impact, and these businesses will have no choice but to continue to hire albeit with potentially increased overheads.  

Conclusion

The NLW was only introduced in April, and clearly we will need time to examine its impacts in full. Leaders in industry and government body’s will be keeping a close watching brief on how it affects the economy, and most especially sectors such as retail that have a very low margin for increased expenditure. While the increased wage will surely come as a welcome relief to many people, questions remain as to its affordability and what its long term impact will be for both British business and economy. In this instance, it is possible that the Government’s determination to increase living standards for many could have adverse effects for exactly those that it is designed to help.  

Mark McFall is Group Managing Director

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