Policy briefing: The National Living Wage

Transcription

1 Policy briefing: The National Living Wage Overview George Osborne s announcement of a National Living Wage (NLW) was the centrepiece of his Summer Budget, important in itself and symbolic of a firmly centrist approach to governing. This briefing sets out the background to the introduction of the NLW. We take a look at the timeline for implementation and how it compares to the existing National Minimum Wage (NMW), and the voluntary Living Wage. A snapshot of stakeholder opinions across a range of different sectors provides insight into how the policy has been received by industry and the public sector. Lastly, we explore possible impacts for employment, inflation and business growth. What is the National Living Wage? In July 2015, the Chancellor of the Exchequer announced the introduction of a compulsory minimum wage premium for all staff over 25 years of age, billing it as a National Living Wage. The new rate will be implemented gradually from April Many considered this to be George Osborne s rabbit in the hat in the Summer Budget, a bold move to capture the centre ground of politics and redress the perception that the Tories are a party of the rich. A month before, David Cameron had laid the groundwork by reviving the Conservative s One Nation ideal with working people able to achieve their full potential at its heart. The NLW now forms part of the government s wider agenda to make work pay and end welfare dependency. The government s proposed rate for the NLW differs to that of the Living Wage Foundation, who calculate a rate based on the cost of living. This is voluntarily paid by some employers at a rate of 8.25 per hour, 9.40 in London. The government s newly announced rate is based on median earnings, and if implemented as expected would see the NLW at 60% of median earnings by 2020, expected to be around 9 per hour. The government has said that the wage will start from 7.20 in April 2016, and has tasked the Low Pay Commission with recommending the trajectory from there to Pay will rise significantly faster under the NLW than the NMW. The graph overleaf estimates the NMW s growth up to 2020 based on average rate of increase over recent years. The NLW, initially set at 7.20, will continue to function alongside the NMW. It will act as an additional premium on top of the minimum rate for over-25s. With the target of 9 per hour by 2020, the new rate could be up to 2 more. 1

2 Hourly rate ( ) National Minimum Wage vs National Living Wage Year (September to October) National Living Wage Adult rate year old rate year old rate Apprentice rate Linear (Adult rate) Linear (18-20 year old rate) Linear (16-17 year old rate) Linear (Apprentice rate) What s the impact? We are in unchartered territory when it comes to the impact of the NLW on employment, inflation and business growth. In 1999 when the national minimum wage was introduced, business warned employment would plummet, particularly in low paid jobs. The Low Pay Commission has since confirmed this was not the case. The Office for Budget Responsibility has said that around six million employees stand to benefit from the pay boost. It has also stated that the extra costs to businesses could result in up to 60,000 job losses. There will therefore be winners and losers across different sectors depending on the options available to employers to offset the additional expense elsewhere. Policymakers, however, believe most businesses affected can absorb cost increases in the prices they charge consumers, particularly with inflation low and economic growth predicted. This time round it is predominantly public sector-funded organisations that have raised concerns. Their anxiety focuses on the ability to keep pace with wage increases whilst investing in and delivering high 2

3 quality services given the Chancellor s planned budgetary cuts across government. How the NLW competes with plans for continued austerity will likely not be understood until the Chancellor s Spending Review for 2016/17 to 2019/20 is announced on the 25 th November. What is certain is that government is committed to the mandatory NLW and this could impact the profitability and growth prospects of certain sectors. Drawing on the views of sector leaders, economic commentators and policymakers we have summarised the following conclusions. We have also posed a number of questions for government, business and investors to consider. Local government funded social care services, such as domiciliary care and care home providers, rely on a steady and reliable workforce. Local government budgets have been identified by the Treasury as an area for further efficiency savings in the Spending Review. Financial strain on providers is a risk without an increase in fees to fund higher wages. Will HM Treasury make an accurate estimate of the cost providers will incur from the new wage and increase budgets accordingly? Is it realistic to expect a ring-fenced budget top-up for social care at a local level to mitigate the impact? A further concern for organisations in the health and care sector is increased competition for staff. With constraints on public funding, it is possible the NLW could mean a greater share of posts in the sector carry a similar wage to jobs in other parts of the economy that prospective employees may consider to less onerous. Indeed, some companies outside of health and social care have already agreed to pay the NLW to staff under-25. How will staffing levels and retention be impacted by increased competition for staff from other sectors? How will the government respond if this places unsustainable pressure on vital health and social care sectors? Businesses will be left with a number of difficult options to fund the NLW. They could raise prices, potentially leading to rising inflation. Depending on the industry they could explore means to increase productivity, for example mechanising processes currently overseen by the labour force. How will the job market be impacted if business-led employment growth slows? The new wage only applies to those aged over 25. Where they can hire younger staff who are not eligible for the new rate employers may do so, potentially reducing the high levels of youth unemployment. This potential outcome would complement the government s ambition to grow workplace apprenticeships for young people. Will the two million under-25s lose out from the policy? Will the government lower the eligibility age over time? The London Living Wage, as set by the Living Wage Foundation, is already 1.30 higher than the rest of the UK. The Chancellor s proposals envisage a uniform rate nationwide, including the capital, as with the current NMW. How will this affect lower paid jobs within London and will the Living Wage Foundation increase its recommended base rate for the capital? Where in the country are the estimated 60,000 job losses take place? If the NLW is simply a higher NMW, what does the future hold for the Low Pay Commission and the Living Wage Foundation? Will the basis of the calculations for the new living wage reflect the cost of living? In recent weeks the Chancellor s plans to reduce tax credits have been widely criticised, notably by the Institute for Fiscal Studies who said that three million families are likely to lose an average of 1,000 a year as a result. Culminating in a controversial defeat in the Lords, the government will now explore whether the NLW and changes in the income tax threshold will improve the lives of low 3

4 income families. Will the Chancellor announce further measures relating to the National Living Wage in the Spending Review to mitigate the impact of reducing tax credits? How have industry and political parties responded? The government has claimed that their so-called National Living Wage (lower than that calculated by the Living Wage Foundation) will compensate for the [tax credit] cut. The independent Institute for Fiscal Studies has said that this is arithmetically impossible The National Living Wage will see payroll costs increase by ten per cent from April 2016, rising to 35 per cent by Unless this is matched by increased Government funding for childcare, the sector will be unable to deliver on the Conservative pledge to provide families with 30 hours of free childcare per week. The chancellor has finally woken up to the fact that Britain needs a pay rise. The additional costs of the new National Living Wage could lead to a catastrophic failure of home-based care services, unless there is urgent action from Government and local councils to address underfunding. The retail industry is not a minimum wage employer. Median wages for hourly paid workers already stand above the rate of the New National Living Wage. " 7.20ph nxt yr & 9 by 2020 is increase in minimum wage (tho offset by cuts in tax credits) but it's not living wage - LW is already 7.85." This is a reckless measure. The introduction of a compulsory living wage will have a devastating impact on thousands of convenience stores. We support a higher skilled, higher wage economy, but legislating for a living wage does not reflect businesses ability to pay. Introducing a National Living Wage for council staff and care workers could cost more than 1 billion per year by

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