by Gerwyn Davies, Labour Market Adviser
In recent years, the prospect of a mandatory living wage has been seen as a theoretical aspiration rather than a practical reality. However, this was turned on its head when George Osborne announced the introduction of a new National Living Wage (NLW) to be effective in April 2016. The proposal has been met with some scepticism from various business organisations. In addition, the Office for Budget Responsibility (OBR) has predicted that the policy will result in 60, 000 job losses in total.
However, similar examples from the UK and abroad suggest the effect may not be so damaging. Despite predictions of job losses when the National Minimum Wage (NMW) rate of £3.60 was introduced in 1999, the UK economy went on to record-strong employment growth. A paper produced by the Centre for Economic Performance at the London School of Economics in 2010 found that the long-term effect of the introduction of the NMW was either negligible or positive (ie more jobs). The explanation, echoed in studies of minimum wages in the US, is that employers respond to the higher wage costs by absorbing them.
New research on potential impact
The CIPD, in partnership with the Resolution Foundation, has recently completed the first stage of a research project to look into how employers might respond to the introduction of the NLW.
The results show that more than half of employers expect their pay bill to rise, and this impact will be felt by the vast majority of employers in the retail, hospitality and retail sectors. However, consistent with the evidence, only 15% of employers say they will reduce the size of their workforce by slowing down recruitment or by making redundancies. Instead, organisations are more likely to report that they are planning to improve efficiency and productivity (30%) or simply absorb the cost into prices (22%). Small firms are much more likely to absorb the cost than large firms, however.
Quite how firms will raise productivity is a challenging and interesting question. CIPD survey evidence suggests that future investment intentions in human and physical capital are fairly positive, with the exception of the public sector. Early interviews with employers for the second stage of the research suggest that some affected employers are looking to make technological improvements in their organisation alongside the rise in wage costs to improve productivity.
Can UK employers deliver higher productivity?
The Chancellor will be the first to raise a smile if employers rise to the challenge with a higher-wage, higher-productivity model. Productivity remains the Achilles heel of the UK economy after all, despite recent improvements. Yet we know that productivity, which can be thought of as how effectively value (ouput) is produced from inputs (people, capital equipment, land, etc.), is not measured by around a third of businesses. In addition, we know that training and the careful selection of the right management practices for each individual organisation are associated with higher relative productivity.
The Chancellor will be very pleased if these large dots can be joined up. The question is whether line managers and human resource professionals can deliver this for him.