Each year, the National Living Wage (NLW) in the UK is decided by the government, based on advice from the Low Pay Commission (LPC), an independent advisory group. The government has set a target for the NLW to reach two-thirds of median hourly pay by October 2024. While the LPC has not yet confirmed its recommendation, it estimates the rate needed to meet this target should be somewhere between £10.90 and £11.43 an hour, probably around £11.16.  

To help it reach a recommendation, the LPC launched its annual consultation in Spring 2023, exploring the impact that both the NLW and the National Minimum Wage (NMW) (the statutory minimum pay rates for all workers aged between 18 and 22) were having on the labour market and invited insights regarding future policy. In our response, we highlighted what the effect had been based on the findings from our Labour Market Outlook report.  

How have employers been impacted by the NMW rise? 

When we asked employers what impact the April 2023 rise in NMW rates had on their wage bill, 18% said that it had increased it by a large extent. A further 24% said the rise had pushed up their wage bill to some extent, while 19% said it had increased it to a small extent. By contrast, 31% reported no impact following the increase. 

Yet some organisations have been disproportionately affected by the NMW and NLW increases. For example, 43% of firms within the hospitality industry said their pay costs had been impacted by the rise to a large extent. Meanwhile, 64% of companies in the business services sector (such as law, accountancy, or PR) told us that they had not been affected at all. 

How did employers respond to these additional wage costs? 

Organisations said that the most common ways they have been managing the growth in their wage bill were by: 

• taking lower profits or accepting higher overheads (30%) 
• raising prices (29%), or 
• improving productivity (23%). 

But among those who said the NMW increase had a significant impact on their wage costs, the most common response had been to pass on the additional cost to customers through higher prices (40%). Employers within the hospitality, entertainment, and recreation (58%) sector, the manufacturing (34%) sector, and the transport and storage (34%) sectors were the most likely to have put up prices.  

When it comes to boosting productivity, among those who mentioned this response (23%), the most common ways they have done this is by: 

• improving general business practices (such as quality control, supply‐chain management…etc) (27%) 
• raising staff morale and motivation (27%), and 
• requiring employees to take on more tasks (23%). 

Again, those who saw their pay bill jump the most have been more likely to adopt these practices – 33% sought to improve staff morale and motivation, 32% required staff to do more, and 28% improved their general business practices.  

How are employers competing for talent? 

While 44% of employers surveyed had hard-to-fill vacancies, among those who said the NMW had a significant impact on the wage bill, 52% had hard-to-fill vacancies, compared with 38% of those who said the NMW had not increased their labour costs.  

Those that have been most impacted by the NMW rise are more likely (54%) to say they have had to increase pay in the past 6 months to address hard-to-fill vacancies than those workplaces that have not been affected by the NMW (44%).  

Against the backdrop of the highest wage increases recorded by the LMO, we investigated the practice of counteroffers. We found among employers that have been most impacted by the NMW increase, 37% reported a rise in the use of counteroffers in the past 12 months, while among those who said the NMW had a moderate impact 27% said there had been a jump. By contrast, among those reporting no impact from the NMW on their pay costs, just 11% said that there had been an increase in the number of counteroffers made.  

In addition to recruitment and retention challenges, many employers (36%) report increasing their salary rates in response to the rise in the cost of living, while almost one-third (30%) expect to do the same next year.  

A new rate for 2024 

While many employers said the April NLW increase was having a major impact on their wage costs, even if that hadn’t been the case, they would still have needed to increase their wages to remain competitive in a tight labour market and compensate staff for higher living costs. Against this backdrop, the idea of increasing the NLW to £11.16 an hour appears reasonable.  

But how to pay for this rise?  

Many have so far done this by increasing their prices, but that is not sustainable in the long run. Instead, to ensure their organisations can generate the money needed to pay for higher salaries, HR teams need to explore ways of improving workplace productivity, such as making sure the organisation has both good people management and business management practices in place.