Why the New National Living Wage Hits More Than Just Salaries; ECONOMIC ANALYSIS

The Evening Standard (London, England), April 7, 2016 | Go to article overview

Why the New National Living Wage Hits More Than Just Salaries; ECONOMIC ANALYSIS


Byline: George Buckley

THE introduction of the National Living Wage raises many questions about the impact it might have on the wider economy, beyond simply influencing the salaries of the UK's lowest-paid workers.

The wage, first announced in the summer's post-election Budget, came in last Friday, meaning employees aged 25 and over are now to be paid a minimum of PS7.20 per hour, an uplift of some 7.5% over the standard National Minimum Wage -- which continues to apply to those aged 21-24.

The plan is to raise it meaningfully, to about three fifths of average earnings, by the end of this Parliament. That's an inflation-busting 6% average increase per year, lifting the Living Wage to over PS9 per hour by 2020.

This is good news for employees at the bottom end of the pay scale. In fact, it's likely to benefit more than just those receiving the legal minimum as firms attempt to retain wage differentials up through the ranks. But what effect might this have on the economy at large? It's difficult to extrapolate the impact of previous increases in the Minimum Wage because the starting base when it was introduced in 1999 was far lower than today. Much depends on how firms react to the rise in minimum pay. First, they could cut jobs or hours to offset the rise in costs, or even replace older workers with younger ones to avoid paying the higher wage rate. In fact, the Government's own independent fiscal watchdog -- the Office for Budget Responsibility -- thinks unemployment could be 60,000 higher by 2020 because of the new Living Wage.

That must be put in context -- employment is up more than one million over the past two years alone and the jobless rate is at its lowest in a decade despite past sizeable increases in the Minimum Wage. However, some believe the impact on employment could be far larger.

Second, firms could pass on increased wage costs in the form of higher prices. That could keep profits unchanged but it would, of course, mean that some of the rise in household wages is gobbled up by higher costs of living. In other words, "real" wages (adjusted for higher prices) would not rise as much.

A third way firms might respond is to improve employees' efficiency in return for higher pay, or provide them with fewer company benefits, both of which would put a lid on costs and thus limit the need to raise prices. …

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