Getting ready for a higher wage floor

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Matthew Whittaker presents RF's latest findings on the implementation of the national living wage

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Getting ready for a higher wage floor

  1. 1. Getting ready for a higher wage floor Tackling Britain’s low pay and productivity challenge Faisal Islam, Sky News DavidNorgrove,LowPayCommission Charlie Mayfield, UKCES Rebecca Riley, NIESR Abigail McKnight, LSE Matthew Whittaker, Resolution Foundation #livingwage / @resfoundation
  2. 2. Taking UpThe Floor Exploring the impact of the NLW on employers MattWhittaker September 2015 @mattwhittakerRF 2
  3. 3. 3 1. A quick recap 2. Measuring the impact on employers 3. Working towards successful implementation Taking UpThe Floor
  4. 4. A (very) quick recap of what it is & who gets it 4
  5. 5. 5 National Minimum Wage (NMW) – compulsory (adult rate covers all 21+) – level recommended by LPC (raise pay in affordable way) Living Wages – voluntary (campaign based) – needs-based principle (raise pay to boost living standards) National living wage (NLW) – compulsory top-up to NMW fromApril 2016 (for 25+) – rate based on ‘bite’ not cash level A quick reminder of what the NLW is (and isn’t)
  6. 6. 6 The NLW will raise the wage floor for 25+ employees by 50p initially From April, NLW will be £7.20, representing a 50p supplement on the NMW Set as 55% bite of median 25+ wage, but is roughly equivalent to 60% bite across all employees Around £1 short of predicted Living Wage outside London
  7. 7. 7 With this premium potentially topping £1 by the end of the decade By 2020, NLW bite rises to 60% of median 25+ wage, raising the NMW supplement to around £1 Goes significantly further than the ‘Bain’ recommendation But remains around £1 short of predicted Living Wage outside London
  8. 8. 3.2 million ‘directly affected’ – brought up to (or above) the new wage floor 2.8 million ‘indirectly affected’ – already earn above NLW, but gain from ‘spillover effects’ as employers retain pay gaps between employees Average individual gross wage gain of £760 – higher for the directly affected Average household net income gain of £410 – reduced by taxes and by loss of benefits for some 8 With around one-in-four employees expected to have their pay boosted by 2020
  9. 9. Measuring the potential impact on employers 9
  10. 10. Impacts will vary – industry – firm size – public/private sector Focus on three metrics – proportion of staff affected (23% nationally) – bite relative to median (65% nationally) – proportional impact on wage bill (0.6% nationally) NB: Not predictions – but indicators of where the most pressure is likely to be felt 10 The magnitude of the change – especially by 2020 – is likely to raise new challenges for (some) firms
  11. 11. 11 Coverage is set to be highest in hospitality, support services and retail Close to half of all employees in the hospitality industry stand to be affected Between one- third and two- fifths in a handful of other sectors Much lower coverage in higher paying sectors such as finance
  12. 12. 12 Bite already varies very significantly and is set to approach (or pass) 100% in some industries A bite above 100% implies that at least half the workforce (including the under-25s) will be earning at or below the NLW High bites are already evident in a number of lower paying industries under the NMW
  13. 13. 13 Wage bill increases will be below 1% in most industries, but significantly higher in a minority of cases 2020 impact looks more challenging than 2016. Boost of £4.5bn is 0.6% of projected 2020 wage bill Set to be much higher in some industries But impact will also depend on relative importance of wages to overall operating costs
  14. 14. 14 Can split industries into three groups in terms of effects and relative size by 2020 – Group 1 A majority of – mainly relatively small – industries face bites of 75% and under, along with wage bill increases of less than 1% These industries account for around two- fifths of all affected employees, with education being easily the biggest single sector
  15. 15. 15 Can split industries into three groups in terms of effects and relative size by 2020 – Group 2 A second group faces higher bites and wage effects from just below 1% to just above 2% These industries account for just under two-fifths of all affected employees, with the retail being by far the biggest sector
  16. 16. 16 Can split industries into three groups in terms of effects and relative size by 2020 – Group 3 Industries in the third group record bites broadly in line with Group 2, but have higher wage bill effects These industries account for around one-fifth of all affected employees, with the food & drink and residential care sectors being the largest
  17. 17. 17 Pressures appear likely to be most acute among micro companies Smaller firms face slightly higher bites than larger ones, but the impact on wage bills are significantly higher among the smallest companies Micro companies account for 13% of all affected employees, with more than half working in forms with 250+ staff
  18. 18. Private sector firms more affected – 2020 coverage: 27% vs 14% – 2020 bite: 71% vs 52% – 2020 wage bill increase: 0.8% vs 0.2% – private sector covers four-fifths of affected employees But public sector faces overall 1% pay cap – particular issue in local authorities where 20% of employees will be affected by 2020 (just 8% in central government) 18 Private sector firms face larger impacts on average, but public sector pay cap adds to the challenge for LAs
  19. 19. Working towards successful implementation of the NLW 19
  20. 20. Impacts appear greatest in hospitality, retail, care and cleaning Smaller firms look more exposed than bigger ones Business has adapted in the past – employment (staffing, hours, under-25 substitution) – pay (non-wage compensation, pay compression) – prices – profits – productivity But the scale of the NLW takes us into new territory 20 The NLW will have a modest impact on many firms, but poses a greater challenge for some
  21. 21. Employer – must meet own commitments in tight environment Funder – social care already under severe pressure Implementer – must clarify the central role of the LPC in monitoring, advising and recommending on the pace of progress Supporter of business – helping firms to boost productivity 21 The government has a clear role to play in ensuring the NLW succeeds

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