The Living Wage: Six months on

Author: James Watkins

Date: 18/10/2016

WagesIt has now been six months since the introduction of the National Living Wage, a measure which entitles all workers aged 25 and over to a higher wage than that afforded by the National Minimum Wage. How has it affected businesses and workers? Is it here to stay?

The introduction of the National Living Wage

The National Living Wage (NLW) was introduced by erstwhile Chancellor George Osborne to combat concerns that the standard National Minimum Wage (NMW) was failing to ensure that many low-paid workers had enough to live on.

The NLW would this redress this situation by giving requiring that all workers aged 25 and over be paid at least £7.20 an hour, 50p more than that which was required by the NMW at the time.

It was intended that the NLW would increase to stay at around 60% of national median earnings.

The concept of a Living Wage was not devised by Mr Osborne – the notion was appropriated from the Living Wage Foundation, which has campaigned for many years for a Living Wage based on how much a household needs to earn to “have a minimum acceptable standard of living”.

As the National Living Wage falls some way short of that which is propagated by the Living Wage Foundation (currently calculated at £9.40 for London-based workers and £8.25 elsewhere), Mr Osborne was criticised for promoting what was essentially an enhanced minimum wage as a living wage.

This wasn’t the only criticism of the move, with others complaining that:

  • The higher wage would cause real problems for smaller business, causing them to abandon investment plans, lay off staff, or even go under entirely; and
  • The age cut-off at 25 would widen the gap in pay between younger and older employees even further.

What has happened?

The impact of the NLW on businesses has been mixed; some businesses have reported ill effects as a result, though it appears that the squeeze on businesses was not as widespread as was initially feared.

Research published by the British Chambers of Commerce (BCC) a few weeks ago indicated that 34% of businesses have seen their wage bills increase since the NLW was introduced.

The research, formed by a survey of over 1,600 UK business leaders, also indicated that a quarter of firms have reduced their recruitment activities since the NLW’s introduction in April.

More business owners said that they would recruit fewer staff or take other steps, such changing staff benefits or increasing prices, if the NLW increased to £9 by 2020.

“A decent wage can make a huge impact on employees' lives and their performance at work, and most businesses are able to pay above the national living wage (NLW),” said Marcus Mason from the BCC. “However, a significant number of firms have already had to re-balance their books to meet the cost of the NLW, which can have a knock-on effect on recruitment or growth plans.

“Many firms would have to change their business models, by increasing prices and reducing staff, if the NLW increases to £9 per hour by 2020.”

Stats released last week by insolvency company Begbies Traynor showed that the impact of the NLW hit businesses in certain sectors harder than in others; retailers, restaurants and wholesalers were among those most affected, due to their reliance on low-paid workers.

In these industries, there was a noticeable increase of businesses in “financial distress” – since April 1st, 33,835 more retailers have found themselves in this position.

What happens next?

The good news for critics of the NLW is that it may not increase at the rate expected over the next few years; forecasts from the Resolution Foundation suggest that it will only increase by 30p next year, rather than the 40p originally predicted, and that it will miss the target of £9 in 2020 altogether.

The bad news is that this is only due to lower-than-expected increases in overall wages over the next few years.

“While there is much uncertainty over Britain’s long-term economic outlook, most economists agree that wage growth in the next few years is likely to be weaker than expected prior to the referendum,” said Conor D’Arcy from the Resolution Foundation. “That means we’re unlikely to see the £9 national living wage that George Osborne talked about in this parliament.”

However, don’t expect the living wage to disappear anytime soon. Theresa May indicated her resolve to maintain the living wage back in August, despite warnings from a number of business leaders.

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