National Living Wage will have modest impact on wage bills in most industries

But hospitality, retail and support services will face significant increases as more workers are affected

Around half of all employees set to benefit from the National Living Wage (NLW) work in industries where the resulting wage bill increase will be just 0.6 per cent or less – though the impact in hospitality, retail and support services will be significantly larger – according to a new report published today (Tuesday) by independent think-tank the Resolution Foundation.

The analysis finds that around one in four workers are expected to benefit from the NLW ­– which will initially be set at £7.20 an hour in April 2016 and is expected to rise to over £9 by 2020. The total wage bill is set to increase by £1.5bn (0.2%) in April 2016, rising to £4.5bn (0.6%) in 2020.

The report finds that around 2.9 million employees benefitting from the NLW – almost half of those affected – work in industries where the wage bill is expected to increase by 0.6 per cent or less. These include education, health, manufacturing and construction. The Foundation notes that employers in these sectors should typically not see a major increase in costs, though some will still face significant challenges, notably in social care, and the situation will vary for different sized firms.

A further 2.7 million employees who are set to receive a pay rise work in hospitality, retail and support services. A far greater proportion of workers in these sectors will be affected – almost half of all hospitality workers will benefit by 2020 – and the increase in their wage bills will be higher. The report finds that hospitality will experience by far the biggest wage bill increase at 3.4 per cent by the end of the decade.

The report finds that the ‘bite’ of the NLW – its value relative to typical hourly earnings – will also vary considerably across sectors. The bite in retail – which is currently 74 per cent – will eventually rise to 88 per cent by 2020.

In hospitality – where the minimum wage bite is already 93 per cent – it is expected to eventually rise to an unprecedented 110 per cent. More than half of all hospitality workers will be paid the NLW or less as a result. It is important to note, however, that part of the reason for this is that a high proportion of workers in the sector (around one in three) are under 25 and therefore ineligible for the NLW.

The Foundation says that it is not yet clear how businesses in the most affected areas will respond to the NLW, though it points to past evidence of modest price rises in hospitality and efficiency gains elsewhere, with warnings of job losses often proving to be overstated. It says that improved productivity growth will be essential if the NLW is to be affordable.

The Foundation is calling on the government to set out a clear plan for implementing the new NLW and clarify the role of the Low Pay Commission (LPC) in monitoring progress and identifying areas of concern – a key recommendation of the RF review of the future of the minimum wage.

That review, led by the first chair of the LPC George Bain, argued for more ambition for the minimum wage but made clear that this should be agreed with the LPC, who would be tasked with identifying roadblocks to successful implementation, gauging the pace at which increases could successfully be introduced overtime, and be responsible for setting out a wider low pay strategy.

The Foundation notes that the government’s ambition of a 60 per cent bite by 2020 is actually significantly more ambitious than the RF target of 60 per cent (cited by the Chancellor in his Summer Budget), as it only applies to the earnings of workers aged 25 and over (and is therefore higher), rather than the whole workforce.

Other findings from the report include:

• Micro-businesses (0-9 employees) will face the biggest increase in their wage bill (1.5%), while large employers (250-4999 employees) will see theirs rise by 0.6 per cent.
• Private sector companies will see their wage bill increase by 0.8 per cent, compared to 0.4 per cent for third sector employers and 0.2 per cent in the public sector.

The Foundation says that while the overall increase in the public sector wage bill is small, it could still prove challenging to implement given the 1 per cent cap on annual increases in the wage bill across the public sector. This is particularly the case in local government, where around one in five workers are expected to receive a pay rise. Fewer than one in ten central government employees will be affected.

The Foundation says the government will need to find significant additional resources in the upcoming spending review to fund the NLW, particularly in social care. Previous RF research found that the higher wage floor means that the sector will require £1.3bn of additional public investment by 2020 (half of which will be returned to the Exchequer through higher tax receipts and lower welfare payments).

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

“The National Living Wage will give a welcome wage boost to six million workers. Pay rises don’t come for free, and the expected rise will take the wage floor into uncharted territory. But with the economy getting stronger the vast majority of employers should be able to afford the new higher wage floor, which will allow their lowest-paid staff to share in the recovery.

“Past warnings about the negative effects of the minimum wage on employment have been wide of the mark, but the size of the increase in the new wage floor will certainly be challenging in sectors such as hospitality, retail and care.

“It’s not yet clear how employers will respond but, while some may opt to reduce hours or new hires,  past experience tells us that most absorb the pressures via some combination of small increases in  prices,  a dip in profits and productivity  gains.

“Having announced the new National Living Wage as a Summer Budget surprise, the government must now set out a detailed plan for implementation. And with the Low Pay Commission playing such a critical role in ensuring the success of the minimum wage over the past 16 years, the Chancellor must ensure it continues to steward the UK’s ambitious new wage floor.”

Ends

Notes to editors

• The report breaks down the impact of the NLW on the total wage bill. It acknowledges that employers’ National Insurance and pension contributions will also increase, though the extent of these will vary considerably according to the working patterns of individual employees and are therefore not included in the analysis.
• The report’s analysis of the impact across industries is based on data which group the UK’s sectors by Standard Industrial Classification (SIC) codes. In this press notice, ‘hospitality’ refers to accommodation and food service activities, ‘support services’ refers to administrative and support service activities and ‘retail’ to wholesale and retail.
• All cash figures are in 2016 prices and are CPI deflated.