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The New National Living Wage – Unintended Consequences?

As of 1 April, some 1.8 million workers in the UK are set to be better off as a result of the introduction of the new National Living Wage. Announced in the summer 2015 Budget as part of the “higher-wage, lower-benefit economy” initiative, it is set at £7.20 per hour and is compulsorily payable to all workers aged 25 and over. This is 50p higher than the National Minimum Wage payable to 21-24 year olds, meaning that a full-time, previous NMW worker aged 25 plus will earn £940 more over the course of the coming year. In addition to 1.3 million of those workers, approximately 500,000 workers who, up until now, earnt an hourly rate somewhere between the two figures will benefit.

The NLW is still somewhat lower than the voluntary Living Wage, which continues to exist, set by the Living Wage Foundation at £9.40 for London and £8.25 elsewhere. Some 2,300 entities are currently signed up to pay those rates, including Barclays and Aviva and large local authorities like Cardiff, Birmingham and Newcastle. They benefit from the Living Wage Employer Mark and Service Provider Recognition Scheme in return for doing so, and report the benefits of voluntarily participating: 80% say that the quality of their employees’ work is enhanced and figures show a 25% reduction in absenteeism for those taking part. Two thirds have noted a significant positive impact in terms of the recruitment and retention of staff.

The LWF’s rates are based on the actual cost of living, whereas the NLW is based on median earnings nationwide. The Government has asked the Low Pay Commission, which has fixed the current rate and will recommend new rates going forward, to aim for a NLW that attains 60% of that median by 2020. By that stage the NLW will stand at over £9 per hour, and the Independent Office for Budget Responsibility has estimated that a full-time NMW worker will have earnt £4,400 more in cash terms as a result. Despite this, the LWF has said that “the job has not been done” in relation to low pay, and has urged employers to continue to participate in the voluntary scheme, which has traditionally received cross-party support.

The IOBR has also warned, however, that by 2020 60,000 jobs could be lost, due to employers seeking to cut back their workforce as they struggle to pay the new rate. The Institute for Fiscal Studies has predicted that the NLW will have a “huge effect”. These warnings have been dismissed by the LPC – but it seems to be on its own. The Federation of Small Businesses has pointed to anecdotal evidence from its members that they will be cutting back on staff, and the Recruitment and Employment Federation has reported a drop in companies having recruitment ambitions for the next three months, from 74% in January to 62% in February.

Figures released by the Association of Licensed Multiple Retailers suggest that the NLW will hit the licensed hospitality sector particularly hard. It estimates that it will result in 4 million fewer hours a week being worked in the UK, with a colossal drop of hours worked in the trade of 11%.

Some organisations have pointed to an element of unfairness underlying the NLW – after all, a 24 year old will potentially earn 50p less an hour than a 25 year old for doing the same work. In addition, the new measure will undoubtedly have a greater impact in the North, North East and South West of the country than it will in London.

There are also various ways that employers can effectively get out of paying the NLW – quite apart from only employing those aged under 25. For example, if a business offers accommodation to its employees, it can deduct a charge (up to £37.45) a week from salaries – and this is not included in the calculation. Employers might decide to axe overtime and other perks, such as Sunday pay, bonuses and London weighting, in order to compensate. The retailer B&Q has already come under fire for cutting other employee benefits to enable it to pay the new rate, and there are doubtless others, whose employees might be too afraid to speak out.

Perhaps inevitably, the issue has been dragged into the Brexit debate, with some in the “out” campaign claiming that the draw of Britain’s new NLW – the fourth highest in the EU after only Luxembourg, France and Ireland – will outweigh any advantage that the “emergency brake” on migrant benefits, renegotiated by the Prime Minister, might achieve. Whilst it’s true to say that the minimum wage in Spain is just over €5 an hour, and in Greece and Portugal it is less than €3.50, while Romania and Bulgaria have minimum wages below €1.50, whether an extra 50p an hour will make any difference at all to immigration remains to be seen.