Employers have responded to the National Living Wage (NLW) by raising prices or reducing profits rather than cutting jobs, according to a report published by the Resolution Foundation.
The think-tank’s report, which includes the first major survey of business responses to the NLW since the policy’s introduction on 1 April, considers both the initial impact of the NLW and its longer term prospects in the wake of the UK’s decision to leave the European Union.
In the survey of 500 businesses, carried out by Ipsos MORI in the weeks running up to the referendum, around a third (35%) of businesses said the NLW had increased their wage bill this year, though only 6% said it had to a large extent. A further 16% of firms expect the NLW to increase their wage bill at some point in the future.
Of those firms affected by the NLW, the most popular short-term action taken has been to increase prices (36%), followed by taking lower profits (29%). One in seven firms said they have already invested more in training (15%), and one in eight (12%) said they had invested more in technology.
The survey found little evidence of more negative responses to the NLW from employers. Roughly one in seven firms (14%) whose wage bill has increased said they have used fewer workers, offered fewer hours to staff or slowed recruitment in reaction to the NLW. Just one in 12 (8%) said they had reduced aspects of the reward package, such as paid breaks, overtime or Bank Holiday pay. Encouragingly, a lower proportion of all firms plan to take these approaches over the next five years.
According to the report, there is little evidence in official ONS data that the NLW has had any significant employment effect among lower paid workers. While employment has plateaued since the end of last year, the Resolution Foundation argues that this has much more to do with pre-referendum business uncertainty and the general tightening of the labour market.
Conor D’Arcy, policy analyst at the Resolution Foundation, said: “The National Living Wage has already delivered a welcome pay boost to millions of workers. The big question has been how employers would respond. The evidence so far is that firms have absorbed some of the impact on their wage bill, while passing on a share of those rising costs to consumers through higher prices.
“Encouragingly, evidence of workers seeing their hours cut or even losing their jobs has so far been relatively limited. The challenge now is for firms to continue to respond positively to the National Living Wage, particularly by raising productivity.”
Brexit effect
The Brexit outcome is likely to have a major impact on the labour market in the coming months and years. The report notes that sectors such as food manufacturing and domestic services, which rely heavily on EU migrant labour and have a high proportion of staff affected by the NLW, are likely to face major changes in how they recruit and pay staff, and operate their business.
The report also says that the decision to leave the EU has significantly increased uncertainty about the outlook for earnings in the coming years. This will have major knock on effects for the NLW because it is set as a proportion of typical worker earnings. According to Resolution Foundation analysis, weaker real wage growth driven by higher inflation in the wake of Brexit could reduce the current projected real value of the NLW in 2020.
Although there is huge uncertainty regarding the short-to-medium term effect on real wage growth, with some projections more encouraging than others, the real-terms value of the NLW in 2020 could be up to 40p lower than had been expected before the Brexit vote.
D’Arcy commented: “Brexit is likely to reshape the landscape in which many low-paying sectors operate. This means that the expertise of the independent Low Pay Commission is more important than ever, and ministers should carefully heed their advice.”
