Written by
Charles Cotton

Published
02 Dec 2015

The National Living Wage: crisis or opportunity?

02 Dec 2015 • by Charles Cotton

To cut through the claims and counter claims about the possible impact that the National Living Wage could have on payroll costs and employment levels, the CIPD surveyed over 1,000 employers in Autumn 2015. However, before I carry on, I should be clear on the terminology as there is more than one living wage. 

There is the National Living Wage (NLW), which was announced in the 2015 Summer Budget. From April 2016, employers will be required to pay workers aged 25 and over at least £7.20 an hour, 70 pence more than the the current adult National Minimum Wage of £6.50. Between 2016 and 2020, the NLW will rise to £9 or 60% of average earnings.

Then there is the Living Wage (LW). This is set independently, according to the cost of living, and is voluntarily adopted by employers wishing to pay more than the legal minimum. The LW was recently uprated to £8.25 per hour for the UK and to £9.40 for London.

So what did our research find? Over half of all employers (54%) say the NLW will have an effect on their wage bill. Overall, almost one in five employers (18%) say they will be affected to a large extent by the NLW, a figure that rises to around a third in retail (33%) and hospitality (32%) and a quarter in manufacturing (25%) and health and social care (25%).

And how are employers planning to respond to this labour cost increase? Asked for the three most important things they plan to do in response to the NLW, organisations are most likely (30%) to say they intend to improve efficiency / productivity. The next most popular response (22%) is taking lower profits/absorbing costs, followed by reducing overtime and bonuses (16%), raising prices (15%) and shrinking the workforce through redundancies or slower recruitment (15%). 

We think it is good news that so many employers are looking at ways to absorb the costs of the NLW through improved efficiency and productivity, rather than cutting pay or jobs, and we would encourage more to do the same. The CIPD is calling for a positive and collaborative mindset from organisations and staff, which focuses on how working practices can be changed to boost production and so pay for the increase in employment costs. We believe that HR professionals should lead the way, by exploring the various means that labour output can be boosted.

We need to answer three questions. First, do our employees have the ability, opportunity and motivation to raise their performance? In terms of ability, is the organisation investing in employee training and development, the introduction of new technology or using smart working practices. In terms of opportunity, are employers giving individuals the chance to use their skills, such as through organisation, work and job design? Finally, are employees being motivated to achieve, such a through the use of financial and non-financial rewards as well as performance development, management and appraisal?

It’s going to be difficult to predict the eventual impact of the NLW on employers. It will depend on many factors including the state of the economy, developments in new technology and changing consumer preferences, as well as how employees themselves respond to being given more money.

However, HR has the chance to prove its value by looking at ways to reduce the potential negative consequences of higher costs by reviewing how working practices can be improved. Rather than treating the NLW as a threat, and responding in a kneejerk manner, employers should look at it as an opportunity, and start too systematically review how work is done and how productivity can be enhanced.

The CIPD is carrying out further research on the National Living Wage, due to be published in 2016. If readers would like to take part in the research, or find out more about what’s involved, please email c.cotton@cipd.co.uk