The Chamberlain News

National Living Wage ‘tough challenge’ for Birmingham employers, report warns

Employers in Birmingham will find it particularly challenging to implement George Osborne’s National Living Wage because of the city’s history of low pay, a think tank has warned.

The Resolution Foundation is predicting that almost a third of a million workers in the West Midlands will pocket a pay rise worth up to £1,200 by 2020 as a result of the NLW – equivalent to a quarter of the over-25 workforce.

The new salary floor, £7.20 an hour from 2016 rising to £9 by 2020, will increase the total wage bill across the region by about one per cent and employers are being warned they must meet the additional costs by increasing productivity, or face a dip in profits.

– Mr Osborne’s “ambitious” policy will have a substantial impact in areas like the West Midlands, Sheffield, Nottingham, Leeds, Cardiff and Liverpool where a quarter of the workforce is paid at rates sharply below the national median.

In London, however, only 12 per cent of workers fall into the low pay trap.

The report warns:

With average gains nationwide of around £750 per beneficiary, or £1,200 for those directly affected, in most of these city regions additional sums of over £100 million will be flowing to lower paid workers due to the NLW. But with these gains for employees comes challenges for employers and localities.

Of course, higher gross earnings for large numbers of low paid employees must come from somewhere. And in aggregate it is an appreciable amount of money.

In Birmingham, Sheffield, Nottingham and Cardiff, total wage bills might increase by around 0.8 per cent, if all else were equal, while in Bristol and London the figures are 0.5 and 0.3 per cent respectively.

The report dismisses fears that the NLW could lead to widespread job losses as firms scale back, and says the experience of the National Minimum Wage gives “grounds for optimism” that unemployment will not increase as a result.

Employers are likely to absorb the cost of the NLW through a variety of measures including freezing the pay of higher earners, reduced profits and higher prices. It’s also expected firms will cut down on waste, invest in training and invest in technology to boost output.

The report says it is “very likely” that the NLW will further increase the proportion of workers who are paid only the legal minimum wage. This has risen from around two per cent in the early years of the National Minimum Wage to five per cent in 2014, and is forecast to rise to 12 per cent by 2020.

In the private sector, over one in seven employees are expected to be paid only the legal minimum by 2020. In some parts of the country this proportion will be even higher.

The report warns an undesirable effect of the NLW might be to create a new generation of workers finding it difficult to rise above minimum wage levels during their careers:

This compression of the wage distribution, while an aspect of reducing inequality, does risk undermining career ladders and progression incentives. These reasons only add to the need for cities to ensure that as many people as possible are paid appreciably more than the legal minimum and do not become stuck on low pay.

Preparing employers for the NLW, in particular the need to increase productivity, will be a key test of economic leaders in the West Midlands and the metro mayor elected in 2017 will play a pivotal role, according to the report.

Adam Corlett, a Resolution Foundation economic analyst and author of the report, said politicians would need to “work closely with employers to ensure that the national living wage is a success, particularly in low-paying sectors”. Mr Corlett added:

Expanding the reach of the voluntary living wage campaign will still deliver higher pay for thousands of workers. It’s also vital that employers create progression routes at work so that staff can be lifted out of low pay altogether.

The document sets out a four-point action plan:

• Raise awareness, both of the NLW and of the need to plan for the upward trajectory of the wage floor in coming years.
• The biggest determinant of success will be the ability of cities to raise their productivity, particularly of low-paying jobs. In part this will require sectoral approaches, and we present data on the differing industrial mixes of the biggest city regions.
• Feedback from the city region level to national government and the Low Pay Commission to help set the levels of the NLW and National Minimum Wage and to identify both best practice and obstacles to success is crucial.
• The rising NLW increases the urgency of opening up pathways for people to progress beyond the legal minimum. Encouraging the higher, voluntary Living Wage where appropriate is one of the approaches that local leaders must pursue.