National Living Wage increases must take account of the uncertain economic conditions following the UK’s referendum vote.
This is the main message the UK manufacturers’ organization EEF want the Low Pay Commission (LPC) to bear in mind when they recommend increases to the National Living Wage, which came into force April this year.
In a response to the LPC’s 2016 consultation on the National Living Wage, the EEF say:
“The LPC should act cautiously when making recommendations for year one (April 2017)
in light of the current economic uncertainty.”
The LPC’s job is to recommend National Living Wage increases in line with the Government’s intention while also taking into account the state of the economy, employment and unemployment levels.
The National Living Wage (NLW) became law in April 2016. It entitles workers aged 25 and over – excluding first year apprentices – to receive at least £7.20 an hour. This puts it at 50p higher than the National Minimum Wage (NMW), which still applies to workers under the age of 25.
The UK’s National Living Wage (NLW) came into force April 2016 and took over from the National Minimum Wage for workers aged 25 and over (except first year Apprentices). This chart shows the rates from 1 April 2016. (Data from Gov.uk)
Currently, the NLW represents 55 percent of the median earnings of workers aged 25 and over. The Government’s intention is that this will increase to 60 percent of median earnings ‘subject to sustained economic growth’.
Keeping to this intention would put the NLW at around £7.60 in April 2017, rising to just over £9 by 2020.
One of the aims of the LPC’s consultation process is to seek views on this projected target. They finished collecting views at the end of July.
‘Do not use straight line approach to NLW increases’
In their response to the consultation, the EEF recommend that following the Brexit vote, the LPC should not follow a straight line approach for NLW increases as previously suggested.
They say there are a number of risks surrounding the current forecasts for how much median earnings might grow – particularly in the next 2 years – and the LPC should recommend only a modest increase to the NLW next April.
Lee Hopley, EEF’s Chief Economist, says:
“What was affordable before the current economic uncertainty and what will be affordable afterwards may be two different things. Ultimately, employers must foot this bill and they need to know that it is calculated in a way that is realistic, affordable and fair.”
‘NLW not a jobs killer’
In the run-up to its introduction, many predicted the NLW would be a “jobs killer.” However, a think tank survey of 500 employers carried out 100 days after the NLW came into force (before the Brexit vote) found it was not the case.
While it is still early days, says Conor D’Arcy, policy analyst for the Resolution Foundation and co-author of a report on the survey, it appears most employers are adopting a “suck it and see” attitude to the NLW.
The survey found only 6 percent of employers said the NLW had had a large effect. Also, of the 35 percent who said their wage bill increased as a result of the NLW, raising prices or taking lower profits were the most common responses to a question about which actions they were taking to accommodate the increase.
‘Concerns around affordability’ of NLW in wake of Brexit
However, since the survey, following the referendum, the Resolution Foundation have made further comments, suggesting that the Brexit vote “will have important consequences” for the future course of the NLW.
They suggest if forecasts of a downturn in real wages turn out to be true, then raising the NLW to 60 percent of median wages by 2020 will prove “difficult to implement for many firms in low-paying sectors.”
The Foundation say the role of the LPC in reviewing National Living Wage increases will be even more valuable in the coming years as they look at how the most-affected sectors react and “what path ahead can deliver for low-paid workers, without putting their jobs at risk.”
The EEF say while taking on NLW has not been onerous for the manufacturers they represent, the Brexit vote has affected their submission to the LPC, because “there is now concern around affordability at least in the short-term.” They add:
“This concern is exacerbated by recent EEF research revealing manufacturers’ plans to review recruitment and investment plans following the referendum.”