Productivity boost key to success of National Living Wage

Lack of knowledge of how to improve productivity may be a challenge, particularly among smaller firms

The need to boost productivity in low-paying sectors and among small employers will be reinforced by the introduction of the new National Living Wage (NLW) in April, though there are huge uncertainties over how businesses can achieve this. This is according to a new report on how employers expect to respond to the NLW, published today (Wednesday) by the Resolution Foundation and the CIPD, the professional body for HR and people development.

It also suggests that employers are far more likely to absorb the cost of the increase than pass it on to consumers through higher prices.

The report is based on a survey of more than 1,000 employers carried out in September 2015, which was followed by in-depth interviews.  It shows that the ways in which employers expect to respond to the NLW varies greatly between small and large employers, and across different sectors of the economy. Over half (54 per cent) of employers expect the NLW to have some impact on their labour costs.

The report highlights a welcome desire by organisations to raise productivity, with 32 percent of large employers expecting it to be part of their response. Several employers that were interviewed said it would spur them to focus more on staff output. For example, one hotel manager explained that they would focus more on training permanent staff, rather than rely on a larger pool of casual contracts.

However, there was considerable uncertainty about how to raise productivity and small firms were more pessimistic about their ability to do this.  Among organisations with less than 250 employees, the proportion expecting to absorb the cost through lower profits (26 per cent) was higher than the proportion expecting to offset costs through higher productivity (25 per cent). Many argued that improving productivity was not viable, with one business summarising concerns by saying, “we’ve done all this before. I don’t think I can get any more out of them [staff] again”.

Encouragingly, there was little appetite for reducing staff levels – just 10 per cent of small firms considered this as an option, rising to 17 per cent of larger organisations. Several employers argued that reducing staff levels or raising prices would hit the competitiveness of the firm, with one hotel owner stating, “if you start cutting staff…that could impact on the guest experience”.

Hiring younger workers because they aren’t entitled to the National Living Wage wasn’t considered a viable long-term plan either. As one employer explained, “because of the need for experienced staff, it would be difficult to employ more people aged 25 and under”.

However, the report suggests there could be an impact on the pay of staff paid above the NLW.  While just nine per cent of employers said they planned to give employees a lower basic pay rise to help pay for the NLW, almost half of employers hadn’t yet decided what to do in order to pay for the NLW.

The challenge for employers is meeting the cost while preserving incentives for career progression and rewarding extra responsibility. One employer highlighted how increases in the National Minimum Wage (NMW) had completely eroded pay differentials saying, “now our wage structure is not so much a structure, it’s more of a wage.”

Several employers raised doubts about how widespread compliance will be. One childcare director argued that there are a high number of workers in the sector who are already being paid below the NMW.

The report makes a number of recommendations to support the successful implementation of the National Living Wage, including:

• Providing information, advice and assistance to firms in low-paying sectors who are looking to raise their productivity, particularly SMEs
• Focusing on progression, for example by ensuring Universal Credit helps low-paid workers into better-paying positions
• Ensuring that enforcement efforts are sufficient to tackle concerns about compliance
• Making the implementation of the NLW a focus of new, devolved economic leadership
• Aligning the timing of the annual uprating announcements of the National Living Wage and the National Minimum Wage to the same month each year

The National Living Wage – the new legal wage floor for workers aged 25 and over, which comes into effect on 6 April – is set to benefit around 4.5 million employees, rising to 6 million in 2020.

Conor D’Arcy, Policy Analyst at the Resolution Foundation, said:

“The National Living Wage will make a huge difference to millions of low-paid staff. The higher wage floor should spur productivity gains, and encouragingly employers seem keen to respond in this way. How these efficiencies are found remains unclear however, particularly among SMEs.

“The introduction of the National Living Wage will be a big bang for low-paid staff. But it will be more of a slow burner for businesses, with many waiting to see how sectors respond over the coming years. This presents a crucial window of opportunity for government to work with business to share best practice, understand the support they need, and consider how productivity can be improved in low paying sectors.

Mark Beatson, Chief Economist at the CIPD, said:

“With just over a month to go until the introduction of the National Living Wage, most employers likely to be affected will be concentrating on the practical steps necessary to ensure they implement the new wage on time.  But our reports suggest there is a lot more uncertainty among employers on how they are going to make sure this step up in pay isn’t one that threatens jobs or the business.

“Large employers appear to have more options available to them when deciding how to respond.  Small and medium sized businesses are more likely to absorb the cost through lower profits, at least in the short term.  Many employers say they intend to manage the cost through increased productivity, but our case studies suggest we may often find a gap between good intentions and reality, due to a lack of knowledge about how productivity can be improved and other pressures on management which mean they never quite get round to changing the way the business operates.

“Government must continue to improve awareness of the NLW by engaging with employers, but this needs to extend beyond help on compliance.  Small firms will need extra help and advice on how they can manage the process, with clear signposting to sources of practical support.

“Universal Credit could help the economy sustain a higher minimum wage if it can deliver practical and focused support for claimants in low-paid work that helps them improve their skills and develops their potential for higher-paid work.  Our concern is that implementation will in the end be driven by pressure for short-term reductions in the welfare bill, with employees encouraged to work more hours for low pay rather than the same hours at a higher pay rate.”

Employer responses to the NLW by firm size