The Impact of the Living Wage

10/11/2016

On 1st October 2015 the hourly adult rate of the National Minimum Wage rose by 20p, from £6.50 to £6.70. This was the biggest real term increase since 2007 and was estimated to benefit more than 1.4 million of Britain’s lowest paid workers. Then, from April 2016, the Living Wage was introduced and now workers aged 25 years and over are legally entitled to at least £7.20 per hour. Great news for those in low paid jobs, but, a few months on, how are businesses faring?

The industries that have seen the greatest impact are hospitality (a third of the workforce affected), security and cleaning (30% affected) and agriculture, retailing and social care (all 20%). 1. Indeed, of the 6 million workers expected to gain, nearly half work in just three industries; retail, hospitality and support services.

When these changes were first mooted, the Federation of Small Businesses predicted that the mandatory Living Wage would have an adverse effect on small businesses which are already struggling with cash flow issues. Many businesses are not only having to increase some employees’ salaries at the lower end but also increasing the salaries of those above the Living Wage in order to maintain a differential in pay.

Yet according to the Living Wage Foundation (whose 2,300 accredited employers go even further and voluntarily pay their workers aged over 18 £8.25 and £9.40 an hour in London), 80% of employers think that paying the Living Wage enhanced the quality of work, reduced absenteeism by 25% and boosted retention rates by 660%. In addition 70% of employers felt that paying the Living Wage enhanced their reputation as an ethical employer.

How are employers covering the higher wage bills?

There have been reports that employees qualifying for the National Living Wage are seeing their hours and overtime cut as employers seek to keep their wage bills down, thus negating the rise they’d hoped to see in their income. This however cannot be sustainable in the long term and businesses will turn to other ways to close the profit gap caused by higher wage bills.

A simple solution would appear to be to pass the rise on by increasing the price of their goods and services to consumers but this cannot be done in isolation of other factors – competition, market perception, etc.

Some industries may look to automate more processes – in the rural environment this is likely to be the case as farming equipment becomes more and more sophisticated. It’s not really an option though for those in the care sector or hospitality where people contact is key.

Has there been a change in Employment Levels as a result of the National Living Wage?

The Keynesian argument is that higher wage rates will increase the disposable incomes of lower-paid workers many of whom have a high propensity to consume. Thus they will increase their spending and this will feed through the circular flow of income and spending and lead to higher profits and then to employment.

This appears to be borne out if we take a look at Australia which has one of the highest minimum wages in the world, and also enjoys one of the highest employment rates. However it would be far too simplistic to say, in this instance, that B (high employment) exists because of A (high minimum wage). There are many factors to take into consideration between A and B. This rosy picture of employment in Australia ignores a great many statistical issues that take certain kinds of unemployment and under-employment out of the official figure - The ‘official’ unemployment figure is the number of people who do no paid work at all, out of a narrow pool of people who are classified as being part of the ‘labour force.’ Also, the minimum wage in Australia is exaggerated since its application to low-skilled groups is tempered substantially, using a sliding scale of rates that reduces the hallmark figure for the main groups affected by the policy.

The European Commission undertook a review of studies on the employment effects of European Union member state minimum wages in 2014. The review concluded “In terms of empirical studies of the effects of minimum wages in practice, the impact of a minimum wage in overall labour costs is on the lower paid end of the labour market and research tends to support the view that the impact is rather small.”

In fact economists on both sides of the debate have produced studies ‘proving’ that the minimum wage does or doesn’t contribute to a rise in unemployment, so the issue remains unresolved.

What about the Future?

Whatever your views on the National Living Wage, it is here to stay. In fact the aim is to increase the NLW to over £9 per hour, roughly 60% of median earnings, by 2020 (an increase of 25% in 4 years). At the same time The Office for Budget Responsibility has estimated that by 2020 there will be 60,000 fewer jobs. Coincidence? – the jury is still out.

As wage and price inflation starts to bite, exacerbated by the weakening GB£, it is even more vital to have up to date, meaningful trading information at your fingertips so that you can react quickly – with Anglian Cloud’s help we can make this happen.

1. Figures from the Labour Force Survey