The National Living Wage (NLW) comes into effect today (Friday 1 April) and means those in work and aged 25 and will have a minimum hourly rate of £7.20. The NLW will rise in subsequent years until it reaches 60% of the UK median wage level in April 2020; likely to be £9 per hour or slightly more.
However, for those aged 21 to 24, and for youth workers and apprentices, the existing National Minimum Wage remains. The NLW is just one part of the Chancellor’s strategy to make work pay and sits alongside efforts to increase productivity and reform welfare.
PwC examines what the introduction of the NLW might mean for Northern Ireland.
In Northern Ireland, the 2015 Heenan-Anderson Commission on tackling social exclusion, hailed the NLW as a welcome step towards dealing with the broader problem of low pay but conceded that further research was needed as to what its wider impact might be.
The Office for Budget Responsibility (OBR) did provide some analysis of Chancellor George Osborne’s plan, albeit at a UK-wide level rather than separately for Northern Ireland or any other region. OBR’s “central” - or most likely scenario - is that the impact on UK GDP would be marginal but total UK employment by 2020 would be 60,000 less than would otherwise have been the case. That was a central forecast, based on a particularly “moderate” view of the “price elasticity of demand for labour”; the extent to which businesses cut jobs as wages increase. A more gloomy view, with a higher negative elasticity of demand, would imply a UK-wide employment reduction of around 120,000.
Given that total employment in Northern Ireland represents about 2.5% of the UK total (i.e. about 800,000 compared to about 30m) pro rata, OBR’s estimate implies a reduction in jobs in NI of between about 1,500 and 3,000 depending on whether one uses the central OBR forecast or the more pessimistic one.
Dr Esmond Birnie, PwC Chief Economist in Northern Ireland commented:
“We know that wage levels are on average lower in NI than in GB. Crucially, the Osborne plan is to increase the NLW to 60% of the level of median UK wages for those aged 25 and over by 2020.
“That implies the NLW will represent a higher per cent of the median here in Northern Ireland. By implication therefore, the employment reduction in NI could be higher than a simple pro rata estimation. A range of 2,000 to 4,000 job losses by 2020, for example, is plausible.
“If we take the most up-to-date official data on earnings levels in Northern Ireland (the Annual Survey of Hours and Earnings), which gives us a snapshot of the situation in 2015, we can estimate that whereas about 12% of employees in the UK would be directly impacted by the NLW, the proportion in Northern Ireland would indeed be higher; about 17% (See Notes for editors,).
“While this is a reasonable assumption based on current date, a snapshot on wage relativities in 2015 may not apply to the situation in 2020.”
While it is unclear how far the rising level of the NLW will have a ripple effect as workers who are currently above the NLW level look for a separate wage increase in an attempt to preserve pay relativities, although OBR warned that the potential could be considerable. We can also identify the sectors likely to be most impacted with at least a 30% of employees directly affected working in farming, restaurants, pubs and cafes, hotels, food processing, retail and residential and social care.
So, what can firms do to place themselves in the best position to accommodate the impact of the NLW, given that they have about four years before it applies in full?
Firms could respond in a number of ways and some of these were evidenced in the recent Bain Reviewfor the Resolution Foundation. They could, for example, raise the prices of their products/services to compensate for the increased labour costs. This assumes that the market would allow them to do that. Alternatively, they could accept lower profit margins but that may not be an option in highly competitive sectors where profits are already marginal.
They could raise productivity whilst maintaining existing levels of employment, assuming they have scope to expand sales significantly. Alternatively, they could produce the existing level of output whilst raising productivity. In this case, jobs would drop. As we’ve already seen, there is a strong possibility that the introduction of the NLW will lead to a lower level of employment.
A lower level of employment would not be desirable and a particularly undesirable outcome would be if businesses began to operate in the black economy.
Firms also have options as to how they handle the question of wage relativities. Esmond Birnie says that, all other things being equal, introduction of the NLW would tend to compress these but expect some resistance to this:
“Firms may wish to use expert advice to conduct job evaluations. Firms could also try to “pay for” the NLW through reducing any non-wage benefits given to their staff.
“The NLW is, of course, part of a wider approach to economic policy on the part of government. The Chancellor is keen to move away from a situation where the Exchequer carries so much of the burden of alleviating low pay through the welfare system and tax credits.
“While that is the big picture, businesses can have legitimate concerns around the process of introduction of the NLW and they do have some choices as to how to respond. It’s worth noting that the Chancellor views a 3% point reduction in UK Corporation Tax rates by 2020 as part compensation for the higher labour costs.”
For its part, government and the public sector will face a direct challenge in those sectors where it sets the level of pay with NLW implying, for example, a major increase in costs in residential and nursing care homes. That sector employs about 9,00o people in Northern Ireland working in 400 homes and it has been reckoned that labour costs represent about 60% of a care home’s turnover.
This begs the question whether there will be a corresponding increase in funding to the Northern Ireland health budget either through a re-allocation between the Northern Ireland Departments or through an increase in the Executive’s block grant from the Treasury.
The NLW is just one of a number of pressures on employment costs including the Training Levy, pension auto enrolment and changes in holiday pay regulation. As with most rabbits that appear from the Chancellor’s Budget hats, the devil is in the detail and the NLW is likely to prove no exception.
