No jobs-killer as employers take a ‘suck it and see’ approach to the National Living Wage

With all the economic and political tumult of the past couple of weeks, the launch of the National Living Wage (NLW) already feels a long time ago. But it’s only been three months since the government’s flagship labour market policy came into force. As with Brexit, we’ll need to wait before judging the full impact of the higher wage floor but a new Resolution Foundation report out today assesses the claims of those who warned the NLW would be a jobs-killer.

The good news is, there’s little evidence so far to back up those fears. We commissioned a survey of 500 employers (carried out pre-Brexit). It finds that most firms haven’t been affected by the NLW: around one-in-three (35 per cent) reported a wage bill increase as a result of the NLW, with only 6 per cent describing it as having a large effect. Among that 35 per cent, raising prices or taking lower profits have been the most common responses.

One way to think of this is a ‘suck it and see’ approach, allowing firms space to monitor how their industry as a whole is reacting without changing their current business model. The NLW is one of a range of policies, including the apprenticeship levy, auto-enrolment and the possibility of fewer workers to choose from as a result of changes to migration, that may herald the era of cheap labour is coming to an end. Coming up with thought-through, effective responses to that takes time.

When it comes to responses that might disadvantage employees, a minority of firms (14 per cent of those affected) have chosen to use less labour, whether through slower recruitment, offering fewer hours or redundancies. This limited impact on jobs is supported by our analysis of the latest employment data. While there is certainly evidence that the employment rate’s impressive upward rise has slowed in recent months, the trends among those most likely to earn the NLW, such as women, part-timers and workers aged 25-34 and 65+, look similar to other workers, meaning the higher wage floor looks unlikely to be the explanation.

Job losses aren’t the only concern of course, but even less common in our survey (8 per cent) has been cuts to perks like paid breaks. And encouragingly, when asked for their strategy across the next five years, these options dropped further down the list. Rising up we see more productivity-enhancing responses such as investing in training, technology and revisiting the tasks employees carry out, something government should do its upmost to support.

The first three months of the NLW appear to have brought a pay rise to millions of workers with, at most, limited employment effects. But the referendum result, announced after our survey was carried out, has changed the game for many firms. What does that mean for the future of the NLW? There is of course huge uncertainty about what Brexit will mean for wages and inflation but with a number of projections suggesting inflation will rise significantly in coming months and years, it’s likely that the real value of the NLW would be lower than expected pre-referendum. And as uncertainty grows about the economy, particularly earnings, so too should the Low Pay Commission’s role. Having successfully charted the minimum wage’s course since the late 1990s, their expertise will be vital in protecting the pay and prospects of the UK’s lowest earners in the years ahead.