Shifting the dial on the UK’s pay problems

Over the last year, there’s been barely a day when the issue of pay hasn’t been out of the headlines. With employment levels consistently rising, the current challenge for both Government and for businesses is to address why pay packets have struggled to follow the same trajectory.

However, we’re starting to see the dial on this shift, starting with last week’s announcement by the Government to accept the Low pay Commission’s (LPC) recommendation to increase the national minimum wage (NMW). The announcement was broadly welcomed, and after months – even years – of pay stagnation for many, this isn’t surprising. From 1 October 2015, the adult NMW will rise by 3% from £6.50 to £6.70 an increase that should be higher than the annual increase in overall average earnings expected this October. However, for many, this didn’t go far enough. Unions in particular thought that the LPC ‘could have been braver’ and given the low paid a bigger increase while some employer groups have expressed reservations about how the cost of the increase will affect them.

For instance, the Rural Shops Alliance noted that the increase came at a time when retail prices have been at best stagnant and at worst falling and called the move an ‘unwelcome increase’ in costs for many of their members. They pointed out that the increased cost of employing people had to be paid somehow. Ideally, they said, this would be in terms of increased staff productivity, but ‘it is a fact of life than the industries in which low pay is overwhelmingly concentrated are precisely the labour intensive industries where it is hardest to increase the output per worker’.

Pay and pay progression will be a central issue for the next Government to consider. So what should be done? Well, the NMW is the law, and it helps prevent the mistreatment of certain groups of employees, such as those aged under 21 or over 65, women, the disabled, the low-skilled and those from ethnic minorities. As such, the CIPD is calling on government to ensure that HMRC has the resources and power to enforce compliance with the NMW regulations to prevent workers from being exploited and law abiding employers from being undercut. Similarly, the government should also support compliance by helping employers, especially small and medium-sized enterprises, understand how much they need to pay through better provision of better advice and guidance.

To prevent significant future drops in value of the NMW, we believe the Government should give the LPC a more explicit remit to consider the impact of the cost of living. We also back the extension of the personal tax-free allowance, over time, to take those working full-time on the NMW out of income tax altogether and thereafter up-rating it in line with the NMW. We would also support moves by a future government to explore what drives inflation for the low waged, such as accommodation and energy costs, and what practical steps can be taken to reduce the rate of increase.

While the CIPD’s own research has found broad support for the NMW to be increased significantly so as to restore its real value, it also shows concerns about this proposal among certain sectors of industry, namely the labour-intensive sectors such as retail, hospitality, catering and leisure. The challenge is that while the NMW impacts on just a minority of organisations, these firms are significant employers. In addition, some sectors, such as retail, are currently facing significant challenges to their existing business models. To increase their costs at the same time that customers are changing their shopping habits would be a double whammy for many.

One option is to vary the NMW according to industry, so that those sectors that are able to pay significantly more are not constrained by those industries that can’t. However, this approach could lead to a number of practical concerns, such as how in this day and age do you go about defining an industry and will certain groups of workers end up being left behind in pay terms? Another approach would be to vary the NMW regionally, but again there are a number of practical challenges, such as how easy would it be for large multi-regional firms to deal with a number of different location-based pay rates and what would be the impact on employers near the borders of two different NMW areas?

An alternative, though more difficult approach, would be for government and business to examine how we can improve employee productivity in labour intensive sectors. The UK has a history of government trying to promote growth in high-tech, high-value added industries. While such programmes are laudable, they only effect a small proportion of the population. Instead, the Government should also focus its attention on helping companies boost productivity in such sectors as hairdressing, cleaning services and food processing. As mentioned, it’s difficult to increase productivity in these sectors, but it doesn’t mean that it is impossible. If we can help these firms increase their productivity through better selection, management, development, reward, and recognition practices then earnings and pension contributions for their workers can increase. You can read more about the CIPD’s viewpoints on low pay and other key issues facing the next Government in the CIPD’s Manifesto for Work.

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