Brexit, low pay and some tough calls

Written by
Dr Angela Wright

24 Oct 2016

24 Oct 2016 • by Dr Angela Wright

Both of these rises and the introduction of the National Living Wage in April of this year at a minimum of £7.20 an hour for adults aged 25 and over, considerably add to wage pressures for employers during a period when general inflation has been low, close to or below 1%. However, that low inflation climate is set to change following the Brexit decision as the lower value of sterling means that imported goods are more expensive and this means food costs will rise. 

As Bank of England Governor Mark Carney recently warned "it is going to get difficult" for those on low incomes as inflation rises. This in turn will put pressure on employers as they consider how to cope with both the rises in the national minimum rates of pay for their employees and also, perhaps, more vocal demands from their lowest paid that they cannot make ends meet. 

The impact will be greatly felt in the low paying sectors, such as retailing, caring and hospitality. Businesses in these sectors tend to have very thin profit margins and will therefore face some tough choices. The ability of small businesses in particular, to absorb extra costs – from both rises in minimum pay rates and other costs that are rising  because of the increased cost of imports (i.e. raw materials) – is likely to be especially problematic.

If businesses can achieve greater productivity – for example, by reducing staff turnover - then they may be able to absorb increased costs more readily than the lowest paid employees will be able to do.

Of course, it is important to remember that the Government set minimum wage rates are not actually set at a level which provides enough income to fund living costs. Only the voluntary living wage (higher than the National Living Wage) is what it says - enough to live on. This is set at £8.25 an hour, or £9.40 an hour in London, compared with the National Living Wage at £7.20 an hour. 

The Living Wage Foundation is expected to announce an increase of this voluntary lowest pay rate, which hundreds of employers voluntarily agree to pay, in early November 2016. It is quite likely the London rate will go to or above £10 an hour and this will be widely publicised – adding yet more pressure to employers, who may be struggling to fund the lower legal minima. 

The current economic and business challenges might result in a squeeze on employment, which has been at high levels in recent years.  Rising costs for employers might mean fewer low paid jobs, adding further to the difficulties of the lowest paid, who may need to make some very difficult choices between necessary items – for instance, between food and home heating. 

The important question to ask is what employers will do when faced with tough decisions ahead. Will they cut jobs to ease their costs? The original remit of the Low Pay Commission was to recommend the setting of a National Minimum Wage rate that would not feed through to higher unemployment. That has now changed with the introduction of the higher National Living Wage. Whether and by how much this rate itself increases (due in April 2017) will be a Government decision - and they too will have some tough decisions to make at a time when they are focused on the Brexit negotiations.