National Living Wage has Little Impact on Employment

National Living Wage has Little Impact on Employment

Businesses are increasing prices and cutting profits to offset impact of the National Living Wage, according to a new report

11th July 2016

By Adam Pescod

It’s been just over a year since George Osborne announced the introduction of the National Living Wage. In a move to bring UK wages in line with other advanced economies, the Chancellor revealed that the National Minimum Wage of £6.50 per hour would be replaced by a National Living Wage (NLW) of £7.20 for those aged 25 and over, with the figure set to rise to £9 by 2020.

While it may have spelled good news for thousands of the UK’s lowest paid workers, many small businesses suddenly faced the prospect of a higher wage bill, with the Office of Budget Responsibility predicting that some 60,000 people would lose their jobs as a result of the changes. Yet, three months following the implementation of the NLW, a new report has suggested the initial impact on employment isn’t quite as bad as many might have feared.

Published by the Resolution Foundation, the think tank that aims to improve the standard of living for low- and middle-income families, the report finds little evidence of the NLW having a significant effect on employment among lower paid workers, whose jobs appeared to be at the greatest risk from the measure. It claims that the plateauing of employment since the end of last year has more to do with uncertainty prior to the EU referendum and the general tightening of the labour market.

The Resolution Foundation also commissioned IPSOS Mori to survey 500 business owners in the early part of June. While 35% of businesses said the NLW had increased their wage bill this year, only 6% said it had to a large extent. Meanwhile, a further 16% expect it to increase their wage bill at some point in the future. It follows a survey that the Resolution Foundation conducted with the Chartered Institute of Personnel and Development last November, in which 54% of businesses said the NWL will affect their wage bill, with almost 20% saying they would be affected by a large extent.

Further findings demonstrate the steps that businesses are taking to meet the cost of the NWL. Of those businesses affected by the NWL, 36% have passed the cost onto consumers by increasing their prices, while 29% have consumed the wage increase and taken lower profits, although this latter measure looks like being a short-term solution, as just 18% of businesses said they expect to take lower profits over the next five years. Companies have also looked at ways to boost their productivity, with 15% saying they have invested more in training and 12% spending more on technology. When businesses were asked about their plans for the years ahead, these figures rose to 21% and 14% respectively.

Taking action
Taking action:

Instead of trimming their workforces, businesses have opted to increase their prices or take a short-term profit hit

Such measures are certainly proving more popular than those targeted at employees. While 14% of businesses said they have used fewer workers, given fewer hours to staff or slowed their recruitment since the introduction of the NLW, 8% said they have cut parts of their rewards package, including overtime, paid breaks or Bank Holiday pay. And an even lower proportion of companies expect to take these approaches in the next five years.

“Encouragingly, evidence of workers seeing their hours cut or even losing their jobs has so far been relatively limited,” said Conor D’Arcy, Policy Analyst at the Resolution Foundation. “The challenge now is for firms to continue to respond positively to the National Living Wage, particularly by raising productivity.”

Encouragingly, evidence of workers seeing their hours cut or even losing their jobs has so far been relatively limited. Conor D’Arcy, Resolution Foundation

The report goes on to suggest that Britain’s departure from the EU will have a marked impact on the value of the NLW, as well as the labour market generally. It predicts that the real-terms value of the NLW could be up to 40p lower in 2020 than had been expected prior to the Brexit vote, owing to a potential weakening of real wage growth. Meanwhile, companies in the food manufacturing and domestic services industries might have to change the way they recruit and pay staff, given their heavy reliance on EU migrant labour and the fact that they have a high proportion of staff affected by the NLW.

“Brexit is likely to reshape the landscape in which many low-paying sectors operate,” D’Arcy added. “This means that the expertise of the independent Low Pay Commission is more important than ever, and ministers should carefully heed their advice.”

All in all, it seems businesses are taking a positive approach to the introduction of the NLW, something that should be applauded.