The Impact of the Living Wage

The Living Wage (or national minimum living wage – NMLW) has been with us since April 2016 and now workers aged 25 years and over are legally entitled to at least £7.20 per hour which will increase to £7.50 per hour in April 2017.  Great news for those in low paid jobs, but, a year on, how are we doing?

What is even better news (for those employees who keep their jobs) is that by 2020 the Chancellor says it will be £9.00. From the original £6.50 this is a 38.4% increase which, in a period of inflation that is practically zero, is impressive. Even allowing for the effects of Brexit and the uncertainty of our place within the European and world economies prices are not expected to increase by anything like 38.4% by 2020.

The Budget Statement (2015,1.127, p. 34) indicates that ‘The government recognises that this new NMLW may increase costs for some businesses’. This can be regarded as the understatement of the decade!

Every business and industry has been and will be affected slightly differently and within each industry different people will have felt the effects in different ways. Let’s look at the retail industry for example where many employees are affected.

The idea of improving people’s living standards by paying them more is great and the first increase, in 2016, is unlikely to have had a significant effect upon the retail sector. It was not intended that staff under 25 would benefit from these increases as but in subsequent years there will be many unintended (mostly negative) consequences for retail businesses, staff hours, remuneration, the number of jobs and store numbers.

Bonuses and Benefits:

Retailers will, in particular, have to rethink their pay/benefits packages because it will be illegal to pay less than the NMLW, irrespective of whether staff would prefer higher benefits instead. In house staff discounts and commission structures are being revised in the light of these increases.

Estimating the Costs of the National Minimum Living Wage for Retailers

Stage One of New NMLW 2016

On the assumption that one-quarter of employees over 25 years will receive the new NMLW, then the additional cost would be in the region of £1,086.46m.

That does not look too bad and should be payable by most retailers. Much more information than is published about the structure of retail pay rates and the number of hours people work is needed to be more precise.

One thing we can only suspect is that smaller stores, convenience shops and small multiples are most likely to pay at or around the NMLW and to have a large proportion of part-time employees.

The 2020 cost of the NMLW

When other factors are taken into account such as maintaining the differentials between employees on other grades, workers under the age of 25 also getting increases and the pension and National effects the total cost to the sector (with the assumption that whatever measures entailed affect only 25% of the workforce) the increase in retail wages costs for employees will be in the region of £3,260.48 million.

How are employers covering the higher wage bills?

Price rises. All retailers will be obliged to pay the new rates of pay and as labour costs rise retailers will try to pass this on to consumers in the form of higher prices. They are unlikely to be very successful in passing on all the costs, but we estimate that the NMLW will increase retailers’ costs, as has already been mentioned, in 2020-21 alone, by £3,260.48m. Taking into account the labour shedding and operational changes they bring in to reduce costs, the NMLW is likely to increase retail prices by about 1.1% per year between 2016 and 2020.

Home delivery charges to increase. Expect prices of services with a high labour content such as courier deliveries to rise and the ending of ‘free’ home delivery for all except high value baskets of goods.

Staff reductions. (See notes below) There will some job losses. Research in the effects of increases in the minimum wage on businesses in California indicates that while some lower income families do benefit not all businesses can absorb the increases and owner managed businesses will do more themselves and less staff/staff hours will be required.

Store numbers will fall. In retail a proportion of stores will close as a result of the NMLW, caused by (a) higher labour costs will make marginal stores unprofitable, and (b) the higher labour costs will push some problematic retailers into administration. Store numbers have been falling for many years and some of these stores would have closed at some time but the higher labour costs will accelerate this process.

Growth in Self-employed Contractors

There will be increased pressure to get service providers to act as self-employed subcontractors, who are therefore not subject to the NMLW. At present this affects couriers and similar providers but could be used with cleaners, security services and other outsourced work. This has been occurring for some time and it is difficult to know what the growth in self-employed contractors will be. But as the work is usually given out by retailers on a price basis, companies with a large proportion of self-employed contractors may supplant more conventional companies because they can quote lower prices.

Retailers will try to extract better terms from their suppliers. However it is difficult to see much progress on this front as they have been doing this consistently since the onset of the recession.

New technology. Customers can expect more self-service and self-scanning technology to be used as retailers try to reduce staff hours, particularly when store opening hours are extended. A lot of new technology will also be applied to warehouse operations. Online retailers may well get more benefit from new labour-saving technologies than physical stores, which may compensate to some degree the higher costs of delivery. Perhaps we will find that Amazon drones are not the fantasy that they have seemed to be up to now.

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

The National Living Wage has not affected employment, says the body that monitors low pay for the government.

In November 2016 the Low Pay Commission said it had found “no clear evidence” of changes in employment or hours since the higher minimum wage was introduced in April.

It said employment had continued to rise even in sectors most obviously affected, such as cleaning, hotels, horticulture and retail.

The finding contradicts warnings from economists over the wage’s impact.

On Tuesday, the Organisation for Economic Co-operation and Development said the UK should be careful with plans to raise the NMLW, warning it could affect employment.

The think tank’s stance echoes the widespread claims of business organisations in the 1990s that the introduction of the UK’s national minimum wage – which started in 1999 – would lead to widespread job losses.

Those fears proved to be groundless, with the number of people in employment rising from 27 million then to nearly 32 million now. The (OBR) estimated that ‘only’ 60,000 jobs will be lost in all sectors of the economy because of the NMLW but this does appear to have happened or at least there has been a corresponding increase in employment in other areas to compensate.

‘No significant change’

The Low Pay Commission warned that “in some cases” employers may have reduced other staff payments or perks to fund the higher basic wage, but said it had found “no significant change” in levels of overtime and the higher hourly rates paid for working on Sundays or bank holidays.

The commission also said that the higher National Living Wage could “present challenges” for the social care sector, with many providers facing losses.

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 NMLW does or doesn’t contribute to a rise in unemployment, so the issue remains unresolved.

(Source BBC – http://www.bbc.co.uk/news/business-38138818)

Whatever your thoughts on the merits or not of the NMLW the effects on the recruitment industry will be profound. With fewer employees there is less opportunity for permanent contracts but more chance to place temporary workers; salaries over time will rise as differentials come in to play but employers will be looking even harder at all costs and so recruiter fees will be under closer scrutiny.

Azuki’s main focus is on helping recruitment businesses to maximise profit from the resources they have and ensuring all parts of the financial organisation are working smoothly.

With thanks to Professor J.A.N. Bamfield, Director Centre for Retail Research whose article and calculations were very helpful in creating this blog (http://www.retailresearch.org/livingwage.php)

References

King, A. and Crewe, I. (2014) The Blunders of Our Governments, edition, London: One World Publications.

Budget Statement (2015), The Living Wage section is in pp. 32 – 34.
https://www.gov.uk/government/uploads/system/uploads/attachment_data/file/443232/50325_Summer_Budget_15_Web_Accessible.pdf

Living Wage Foundation http://www.livingwage.org.uk/