Corporate & Commercial. The National Living Wage Autumn 2015

Transcription

1 Corporate & Commercial The National Living Wage Autumn 2015

2 The national living wage In the 2015 summer budget, the Chancellor announced that a national living wage (NLW) will be introduced from April 2016 at This will be 70p higher than the national minimum wage at the time of the summer budget, and 50p above the minimum wage that came into effect in October By 2020 the NLW rate is expected to rise to 9.35 an hour according to the Office for Budget Responsibility (OBR). 11 % The NLW will cause increased employment costs for businesses by April 2016 we ll see an increase in pay of almost 11% on the national minimum wage at the time of the 2015 summer budget. Summary of the likely impact of the national living wage (NLW) By 2020, the increased cost to businesses from the NLW will be just over 1% of corporate profits according to OBR estimates. The impact is likely to be greatest on small and micro firms, who account for 21% of the total workforce but 37% of all minimum wage jobs. The NLW will lead to Britain s total wage bill to rise by 0.6% in 2020 but firms employing less than 10 people will see their total wage bill rise by 1.5% according to the Resolution Foundation. The effects will be felt most outside London and the South East where wages are lower. For most industry sectors, the impact of the NLW will be small, and the overall effect on the economy will be limited. Certain sectors, notably retail and leisure, where around half the workforce is low paid, will be harder hit. The NLW will add 3.4% to total wage bills in hotels and restaurants, the highest increase by sector, and 2% to total wage bills in retail in 2020 according to the Resolution Foundation. Businesses need to be preparing now. For people over 25 who are on the national minimum wage, the national living wage will mean a pay increase of 44% over the 5 years to The Bank of England s inflation target is currently 2% per annum so around three quarters of this rise will not be offset by inflation by The NLW will apply to workers aged 25 and over. People aged 21 to 24 will get the national minimum wage. NatWest Corporate & Commercial 2

3 Plans to increase the national living wage by 2020 The government has asked the Low Pay Commission to set out how the NLW will reach 60% of median earnings by The concept of setting a minimum wage target based on 60% of median earnings was first set out in Resolution Foundation report written by Professor Sir George Bain and others. Based on OBR forecasts, the NLW will reach the government s target of over 9 by 2020 at This will mean a boost in earnings for 2.7 million workers, and the OBR believe that knock-on effects further up the wage distribution could mean a further 3.25 million people also see a rise in wages. Chart 1 National minimum wage and national living wage, historical and forecast The chart opposite sets out the OBR s expected profile of the NLW. The NLW will only apply to workers aged 25 and over. Those aged 21 to 24 will receive the national minimum wage the priority for them will be to secure work and get experience National minimum wage Forecast national minimum wage National living wage Forecast national living wage Source: HMT calculations bases on OBR forecast of average hourly earnings and historical and announces National Minimum Wage By the end of this Parliament, a person over 25 working 35 hours a week and previously earning the national minimum wage will see their gross wages rise by around a third compared to , or 5,200 in cash terms. NatWest Corporate & Commercial 3

4 Changes to allowances and tax As the NLW may increase costs for some businesses, from April 2016, the government will increase the National Insurance Contributions (NICs) Employment Allowance from 2,000 to 3,000 a year. This will help all businesses and charities, particularly smaller ones, with additional wage costs. As a result, up to 90,000 employers will see their employer NICs liability reduced to zero. When introduced in 2014, the Employment Allowance offset the NICs costs of employing four workers full time on the national minimum wage. The increase in the Employment Allowance will mean firms will be able to continue to employ four workers full time on the NLW next year, without paying any NICs. The further reduction in the rate of corporation tax will also cut costs for businesses, as will reforms to the Annual Investment Allowance. The employment impact The introduction of a NLW will reduce the incidence of low pay and will increase the returns from working. The OBR estimate the NLW could lead to a reduction in average hours worked by 0.2% by 2020 and 60,000 less in employment in the UK with increasing automation used. But interestingly, the OBR estimate that even after the introduction of the NLW, employment is forecast to rise by 1.1 million by 2021 only 60,000 lower than it would have risen to without the NLW. There s a chance we could see further EU migration to the UK as this will put our minimum wage levels higher than France and Germany s. The new wage could encourage the employment of under 25s (although it s not legal to age discriminate), and pay rises for employees earning over the living wage could be reduced to pay for living wage increases. The economic impact of the NLW will be felt most outside of London and the South East as shown in the opposite table. Evidence from the introduction of the minimum wage shows that the overall economic effects were relatively minor. While some studies have found reductions in employment from increases in the minimum wage, these have generally been modest and other studies have found no robust evidence of any negative employment effect. Between 2001 and 2004 the minimum wage rose by 31% over four years with no large impact on employment. The Low Pay Commission said in 2011 that, The consensus of the research findings on the impact of the national minimum wage in the UK is that it has not significantly adversely affected employment but that it may have had a small negative impact on hours. Firms adjusted through other channels - by adjusting profits and pricing strategies, changing pay differentials and, in low paying sectors, boosting productivity. Chart 2 Number and share of people gaining from the national living wage by 2020 Region Number % of workforce North East 150,000 12% North West 350,000 11% Yorkshire and the Humber 250,000 12% East Midlands 250,000 12% West Midlands 300,000 12% South West 250,000 10% East 250,000 10% London 200,000 5% South East 300,000 8% Wales 150,000 12% Scotland 200,000 9% Northern Ireland 100,000 13% Total 2,700,000 10% Source: NatWest Corporate & Commercial 4

5 The economic impact by sector According to the Bain Review, three quarters of low paid jobs are in 10 industry sectors (defined as if their gross hourly wage is less than two thirds of the overall median) as shown in the following table. Retail has the highest share of all low paid at almost a quarter of all low paid employees in the economy with restaurants having a further 14%. Chart 3 Low pay by sector industry sectors with highest share of all low paid employees Industry division and SIC code (2 digit) Number of employees that are low paid Proportion of employees that are low paid Share of all low paid employees Retail trade, except of motor vehicles and motor cycles (47) 1,215,470 50% 24% Food and beverage service activities (56) 680,400 68% 14% Education (85) 492,390 12% 10% Residential care activities (87) 275,190 44% 6% Services to buildings and landscape activities (81) 236,240 54% 5% Social work activities without accommodation (88) 185,830 31% 4% Employment activities (78) 179,720 35% 4% Accommodation (55) 168,360 57% 3% Wholesale trade, except of motor vehicles and motorcycles (46) 158,380 16% 3% Human health activities (86) 108,610 5% 2% All divisions 4,893,180 19% 100% Source: NatWest Corporate & Commercial 5

6 The 10 industry sectors with the highest proportion of low paid workers according to the Bain Review are in the following table. Hotels and restaurants have the highest proportion of employees that are low paid by sector at 57% and 68% respectively. Chart 4 Low pay by sector industry sectors with highest proportion of low paid workers Industry division and SIC code (2 digit) Number of employees that are low paid Proportion of employees that are low paid Share of all low paid employees Food and beverage service activities (56) 680,400 68% 14% Accommodation (55) 168,360 57% 3% Services to buildings and landscape activities (81) 236,240 54% 5% Retail trade, except of motor vehicles and motor cycles (47) 1,215,470 50% 24% Residential care activities (87) 275,190 44% 6% Other personal service activities (96) 85,160 44% 2% Manufacture of wearing apparel (14) 8,620 44% 0% Gambling and betting activities (92) 42,470 40% 1% Sports activities and amusement and recreation activities (93) Crop and animal production, hunting and related service activities (1) 104,810 37% 2% 42,090 36% 1% Source: NatWest Corporate & Commercial 6

7 Chart 5 The impact of the national living wage by sector in 2020 % wage bill increase All industries 0.6% Hotels and restaurants 3.4% Agriculture 1.7% Wholesale, retail and repair 1.3% - Retail 2.0% Arts, entertainment and recreation 0.9% Admin and support services 1.7% Other service activities 0.9% The NLW will lead to a 0.6% rise in the total wage bill in The most affected sector will be hotels and restaurants with a total wage bill rise of 3.4% as shown in the opposite table. Social care could be doubly hit firstly because wage increases will be relatively high, and secondly if councils find themselves suffering too and choose to cut payments to care homes. Human health and social work 0.6% - Residential care 2.8% Transport and storage 0.3% Real estate 0.3% Manufacturing 0.5% Construction 0.2% Education 0.3% Public admin and defence 0.1% Prof., scientific and technical 0.2% Information and communication 0.1% Finance and insurance 0.0% Source: uploads/2015/09/nlw-ii.pdf NatWest Corporate & Commercial 7

8 The economic impact on the retail and leisure sector The retail and leisure sector will be the most affected sector as it has almost half of all low paid employees in the economy. The hotel and restaurant and retail sectors have 50% or more of their employees in low paid jobs. The NLW will add 3.4% to total wage bills in hotels and restaurants, the highest increase by sector, and 2% to total wage bills in retail in 2020 according to the Resolution Foundation. The sectors will have until 2020 to prepare for this but will need to start preparing now to accommodate this. There is unlikely to be an increase in consumer expenditure from the NLW. Although the NLW will boost household incomes, the cuts to working-age welfare outlined in the summer budget will lead to an overall reduction in mean household incomes for lower to middle incomes families in 2020, according to the Resolution Foundation. The minimum wage was introduced in April The retail sector managed to absorb this without employment decreasing. In Q there were 4,852,000 people employed in retail and wholesale according to the ONS, by Q this had risen to 4,935,000, an increase of 1.7%. However, this is significantly below the 15.6% growth in workforce jobs across all sectors over the same period. Some of the lower growth in employment in retail is due to structural change with the growth of internet retailing over this period. Over the same period employment in hotels and restaurants has risen 27.8% suggesting the minimum wage has had no negative effect on employment in that sector. How businesses can prepare As a bank, we need to make sure that our clients are working toward the change. There may be a slight rise in businesses going under in sectors with a lot of low paid workers especially smaller firms. Profitability in more affected sectors may be reduced in the medium term, and firms may need to take on more debt to fund the rise in wages. But with preparation, these impacts can be minimised. For example, a business might choose to freeze pay rises for those on higher wages, raise its prices, absorb the cost from profits or look to introduce more automation. The retail and leisure sector will be the most affected sector as it has almost half of all low paid employees in the economy. NatWest Corporate & Commercial 8

9 Written by Justine Lovatt, Sector Economist, MI and Analytics, Royal Bank of Scotland. Visit us online: Important Information This material is published by NatWest plc which is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority for the conduct of regulated activities in the UK. This is not Investment Research. It has been prepared for information purposes only and does not constitute a solicitation or an offer to buy or sell any securities, related investments, other financial instruments or related derivatives ( Securities ). It should not be reproduced or disclosed to any other person, without our prior consent. This material is not intended for distribution in any jurisdiction in which its distribution would be prohibited. Whilst this information is believed to be reliable, it has not been independently verified by NatWest and NatWest makes no representation, express or implied, nor does it accept any responsibility or liability of any kind, with regard to the accuracy or completeness of this information. Unless otherwise stated, any views, opinions, forecasts, valuations, or estimates contained in this material are those solely of the NatWest MI and Analytics Team, as of the date of publication of this material and are subject to change without notice. Recipients of this material should make their own independent evaluation of this information and make such other investigations as they consider necessary (including obtaining independent financial advice), before acting in reliance on this information. This material should not be regarded as providing any specific advice. RBS accepts no obligation to provide any advice or recommendations in respect of the information contained in this material and accepts no fiduciary duties to the recipient in relation to this information. NatWest Corporate & Commercial 9