Written by
Dr Angela Wright

Published
01 Jun 2016

National Living Wage: productivity is key for businesses to afford new rate

01 Jun 2016 • by Dr Angela Wright

The changing wage

The current ‘living wage’ in London (calculated by the Mayor for London’s office) is £9.40 an hour, and the figure outside London is £8.25 (set by the Living Wage Foundation), also substantially higher than the National Living Wage of £7.20, which  is only payable to people over the age of 25. 

The low-paid sectors of retailing, hospitality, catering and caring, are the sectors which are most affected by the National Living Wage and women are more affected by the rise in lowest rates than men. Interestingly, the gender pay gap reduced after the National Minimum Wage was first introduced in 1997. These sectors employ large numbers of people; the pay rates have traditionally been low, and businesses in these sectors may have thin profit margins.

The National Living Wage will further be increased to £9 in 2020 and businesses will need to prepare for this additional rise. Many may be able to accommodate this rate without it affecting their reward structures elsewhere in their company. However, there is always a concern that a rise in the lowest pay rate could trigger pay claims from others in the organisation – particularly those paid just above the new minimum rate.  Companies may find it beneficial to move to pay structures which use pay ranges, such as ‘wage for age’ type pay scales for younger workers, rather than single point or spot pay rates (as currently used by some large retailing firms) so that they can effectively manage the introduction and development of the National Living Wage to help mitigate the costs. The fact that the National Living Wage only covers the over-25s will tend to make this form of pay structure more popular as employers can progress young workers from the lower National Minimum Wage to the National Living Wage depending on their age.

Drive engagement

In the early years following the introduction of the National Living Wage in 1997, the majority of people on the minimum rate didn’t stay on this low wage for long, moving to higher rates within the same company or elsewhere. However, in recent years fewer people have been able to escape the absolute lowest level of pay, and these were again mostly women - particularly older women and younger single mothers. Hence, there may be a divide between the cost experience of organisations which employ large numbers of older women and single mothers, who are less mobile in terms of moving jobs, compared with company workforces with more low paid young men and women without children, who will tend to change jobs more frequently. For example, the local café that employs students by the hour during weekends and holidays may not see their labour costs rise, while the florist shop round the corner, with the owner employing perhaps one or two older experienced staff, is likely to be affected to a greater extent.

As to predicting what employers are going to do, we can look back at the experience of when the National Minimum Wage was introduced. Then, some companies reduced employee expenses, for example travel costs, employee benefits such as discount schemes in retailing, reduced overtime,  or cut the working hours of employees on hourly-paid contracts. People on zero-hours contracts may be especially vulnerable with the new rate as they could be offered less paid work each week, cutting their gross incomes at the same time as their hourly rate rises.

A ‘win-win’ way to accommodate the National Living Wage could be for employers to make productivity improvements. These would help absorb the costs associated with wage increases and benefit businesses in the longer term. For example, in retail, several of the large chains currently target the National Minimum Wage as their lowest pay rate, one exception being the John Lewis Partnership, which tends to pay more. As a result, John Lewis’ staff turnover rate is lower, allowing the partnership to save on recruitment expenditure and initial training costs compared with its rivals. Moreover, its staff are also likely to be more productive because of their higher level of experience. 

Overall, better paid employees are likely to be more engaged and provide more so-called ‘discretionary effort’, voluntarily going above and beyond the minimum required in their roles and actively contributing to the success of an organisation. And this can make all the difference when it comes to company performance, especially in competitive sectors such as retail.