The Cost of the Living Wage

December 15, 2015

National Minimum Wage (NMW) workers aged 25 and over will, from April 2016, see an increase in their hourly earnings. The National Living Wage (NLW) will be introduced in April 2016, with a starting rate of £7.20. This will be the new legal wage floor for workers aged 25 and over, with the current NMW becoming in effect the rate applying to 21-24 year olds. The rise from the current NMW of £6.70 to the NLW of £7.20 is a 7.5 per cent nominal increase, the largest since 2004. Thereafter, the NLW is expected to rise steadily, surpassing £9 by April 2020.

Chancellor George Osborne’s announcement regarding the NLW during the Summer Budget in July 2015 sounded like a blessing for the six million workers set to benefit.   However, since then, financial institutions, retailers, and employees have been doing the numbers, and it turns out to be infinitely more complicated than simply paying workers more. The NLW is expected to cost 60,000 jobs and reduce hours worked by four million a week, according to the Office for Budget Responsibility. Tesco Chief Executive Dave Lewis has voiced concerns over the increase, coupled with soaring business rates, claiming that the two are a ‘lethal cocktail’ which could potentially result in the closure of shops and a loss of jobs.

It seems that employers are divided over how best to manage the higher costs caused by the NLW. While some are opting to improve efficiency through investing in technology that can handle manual tasks typically carried out by low-paid workers, others are planning to absorb the costs. A survey carried out by CIPD of more than 1,000 employers across all three sectors found 41% of those questioned did not feel that the higher wage would increase the organisation’s wage bill, with only 22% feeling that it would to some extent. With such changes looming it would seem that now is the time for HR to step up and evaluate how best to improve organisational structures and therefore challenge cost-cutting.

The risk of too much change is that employees may start to become aware of what is happening. Cut backs on allowances and out-of-hours payments or reductions of bonuses and profit shares may not be well received by current employees who are accustomed to such rewards. With that in mind, some organisations may try to work around the law, freezing recruitment or hiring staff on a self-employed basis to ensure the NLW does not apply to them.

There may also be a shift in demographics of workers since the increase applies only to those who are aged 25 and above. This may prove particularly prevalent in sectors that depend on low-paid workers, such as social care. The danger with this move is that a wave of discrimination claims may soon hit employers. Whilst equality law provides an exemption to ensure that pay bandings do not contravene discrimination law, this is arguably susceptible to a challenge on the grounds that it breaches European law.

Aside from the possibility of discrimination claims, employers also face the challenge of keeping employees on all levels happy. In order to hit the target of £9 by 2020, the NLW will have to rise by 6 to 7% per year while the average salary will remain at 2%. If those on a higher level see those below benefiting from a larger pay rise, employers may end up with dissatisfied employees.

Encouragingly, research carried out by PwC shows that a number of larger companies plan to keep one rate for all workers. This may be because they do not employ large numbers of under 25’s, or in order to keep their business structure as simplistic as possible, or simply to avoid potential discrimination claims in the future. There is evidence to support the theory that paying skilled workers ‘skills pay’ benefits the employer in the long run. This provides the business with a greater return as, where workers are more productive at carrying out their job, fewer employees are required. Paying staff a wage that reflects their ability is also likely to improve retention rates and prevent them leaving for a small increase in pay offered by competitors, thereby reducing the costs of recruitment.

Ultimately, it will be the decision made by the thousands of businesses affected, ranging from supermarkets to hairdressers and corner shops, of how to deal with this increase in NLW which will determine exactly how successful Mr Osborne’s proposal turns out to be.

Michael Black
028 9027 1312


Please note: The content of this article is for information purposes only and further advice should be sought from a professional advisor before any action is taken.