National living wage to have ‘temporary effect’ on average earnings

Employment will rise by as much as half a million in 2016 but average wage growth is likely to plateau after the introduction of the government's national living wage, the CIPD has predicted.

The Office for Budget Responsibility (OBR) and the Bank of England has forecast average earnings growth will be around 3.5 per cent in 2016, but Mark Beatson, chief economist at the CIPD, described this as “very optimistic”.

According to the CIPD, pay expectations for the year ahead will actually centre on a 2 per cent increase, but as inflation is also expected to remain low, most workers will still feel better off.

While the introduction of the compulsory national living wage for over 25s might push up the official figures for average earnings, Beatson said other cost increases in the labour market, including the apprenticeship levy and increased pensions costs, “will potentially restrict the ability of employers to afford significant pay rises”.

The government’s national living wage of £7.20 - set to come in this April, rising to £9 by 2020 - has been criticised for not accurately reflecting the cost of a decent standard of living for a full-time worker. The Living Wage Foundation (LWF) has calculated that a more accurate ‘living wage’ stands at £9.40 for London and £8.25 for the rest of the UK.

A new commission chaired by Gavin Kelly, chief executive of the Resolution Trust, has been launched by the LWF to enhance the reputation of the voluntary higher-level living wage and to review the methodology for calculating it. *

However, the CIPD said that disappointing productivity growth would remain the biggest risk to the UK’s long-term economic prospects. And while the apprenticeship levy is expected to encourage more employers to invest in developing their workforce and boost productivity, “there are real question marks over whether the levy will help improve the quality of apprenticeship programmes,” Beatson said.

Skills shortages are unlikely to pose a major problem for most employers in 2016 the CIPD said, with the majority feeling confident about recruitment, alongside records levels of net migration that are significantly increasing the supply of labour.

Beatson said a fundamental review of skills policy would help to evaluate the UK’s skills system and support “meaningful progress” in addressing productivity deficits.

“Investment in leadership and line management capability is integral to getting the best out of people, and apprenticeships will have little impact on addressing this key skills deficit,” he said.

“While we now have seen two quarters of productivity growth, there’s clearly still work to be done to make this sustainable, which is the only way of delivering improved living standards in the longer term.” 

*Full list of LWF commissioners

  • Gavin Kelly, chief executive, Resolution Trust (chair)
  • Dame Fiona Kendrick, chairman and chief executive, Nestlé UK and Ireland
  • James Watt, captain and co-founder, Brew Dog UK
  • Frances O’Grady, general secretary, Trades Union Congress
  • Jayne Dowden, chief operating officer, Cardiff University
  • Julia Unwin, chief executive, Joseph Rowntree Foundation
  • Bishop Rob Wickham, Bishop of Edmonton, Diocese of London
  • Professor Paul Gregg, director of the Centre for Analysis and Social Policy, University of Bath