Work and Pay

Which businesses will be most affected by the National Living Wage?

  • Published: Mar 01, 2016
  • Author: Peter Kenway
  • Category: Work and Pay

The new national living wage, in effect a new name for the national minimum wage for all but the youngest workers, comes into effect next month. The new name is a headache for supporters of the Living Wage, who now have to distinguish their wage standard from the new competitor. But as yesterday’s report from the British Retail Consortium shows, the NLW is also a concern for companies too. Our new report shows why it is no surprise the BRC is speaking out – and also why it shouldn’t be taken as being representative of business either.

Declining business influence

According to the BRC, the NLW, combined with the new apprenticeship levy, will mean fewer jobs and more business closures over the next decade. Whether this prediction is right or not, the BRC’s concern reflects the way that the NLW represents a waning of business influence.

This waning can be seen in the numbers. Set at £7.20, the NLW is a 50 pence (7.5%) increase on the current value of the NMW. An extra 50 pence is a much bigger increase than workers on the NMW have been used to. It took the last three years for the NMW to creep up 51 pence to £6.70.

The jump reflects the different ways in which the NLW and the NMW are set. The NMW is set by the Low Pay Commission, on which both employers and trade unions are represented. Exactly how it reaches its decisions is opaque, but business certainly has a significant influence. In the early years, the Commission proceeded carefully in the face of continued business warnings about the millions of jobs that would be lost if the wage went up too quickly.

By contrast, the NLW was simply announced by George Osborne in his post-election Budget last July. Instead of being asked, businesses were just told.

The impact of the NLW on companies

The NLW is a sign of how official thinking is shifting towards seeing companies as a source of problems for government. One consequence is that companies are becoming ever more an object of government policy. Understanding the impact of policy on companies faces its own challenges. The average impact is a poor guide because companies vary so much and many are a long way from average.

Our new research paper presents estimates of how many employees are directly affected by the NLW. The results must be treated cautiously. There are some important gaps in the official data on which it is based (such as how many employees are under 25, which we have modelled) and there has been little research in this area. But it’s the pattern, rather than the precise estimates, that are of most interest here.

Overall, 1 in 8 of all employees – 12.5% – are directly impacted by the NLW. The graph, from our research, shows how that proportion varies by sector and company size. In retail/wholesale, health and social work and admin and support, the proportion can be at least 20%. In hotels and restaurants it is approaching 40%. Elsewhere it is much lower, about 5%.

Overall, the proportion of employees impacted is slightly higher in small companies (1 to 50 employees) than big ones (250+ employees). The graph shows that is especially so in manufacturing (where the proportions are low) and also hotels and restaurants (where they are high). But in other sectors, the proportion impacted directly is higher in big companies.

Why the BRC is concerned – and how to react

When it was announced, the NLW gave substance to the Chancellor’s claim to have fashioned a budget for working people. As the day of its introduction approaches, the government will once more hope to bask in the glow of a pay increase for which it is responsible going to one in eight private sector employees. How might business react?

Our research also shows that 24% of all those directly impacted by the NLW are employed in large companies in retail or wholesale, so it is easy to see why the BRC are speaking out. But with about three quarters of those affected in the retail sector being employed by big companies, retail is a special case. For example, those affected in the hotel and restaurant industries are more evenly spread across small and big companies.

As April approaches, further criticism of the NLW can be expected. How well-founded it is will be open to debate. What is for sure is that when it comes to companies, no-one comes close to speaking for all.

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