Earlier this week, I read several articles in the Financial Times about how the world will be watching the UK when the new national living wage of £7.20 an hour for workers over 25 comes into effect from today.
These articles described how countries around the world, including Germany, Japan and Malaysia, are introducing or increasing minimum wages in order to reduce inequality, kickstart wage growth and tackle high unemployment levels. A number of American states, including California, have also set out plans to increase minimum wage levels over the next few years.
While a minimum wage as a concept in the UK is nothing new, today’s rise will mean wages for approximately 1.8 million low-paid workers will increase four times faster than expected average earnings this year.
But, such a rapid increase inevitably poses a challenge for employers, who must seek ways of funding the rise. This may be why the national living wage has met with such mixed reaction since it was first announced in the 2015 Summer Budget.
While any initiative that results in a pay increase for employees is typically seen as a good thing, some experts have countered that, in the long run, the rise could adversely impact employees as employers look for ways of funding higher wage bills.
In many instances, employers won’t simply be looking to increase wages for their lowest-paid workers. If they wish to maintain existing pay differentials across the business, this could mean wage increases are required across the board.
According to the Chartered Institute of Personnel and Development (CIPD) and Resolution Foundation’s report Weighing up the wage floor: employer responses to the national living wage, published in February, 20% of the 1,035 respondents plan to maintain pay differentials between employees affected by the national living wage and their managers.
While some organisations plan to pass these costs on to customers via higher prices, others are looking at cutting employees’ hours, overtime or incentive schemes. The CIPD and Resolution Foundation’s research, for example, found that 16% intend to reduce overtime and bonuses to mitigate national living wage costs, 9% will reduce the basic rate of pay growth for the rest of the workforce and 8% will hire more workers under the age of 25.
Where this results in employees’ total take-home pay not being any more than before the increase, surely this defeats the point of having a new national living (or minimum) wage?
Organisations that turn to such measures, therefore, may risk creating a less-than-favourable image of themselves as an employer. After all, in many cases, they will be competing for talent with organisations that have received accreditation for paying the higher voluntary living wage set by the Living Wage Foundation. This currently stands at £8.25 an hour and £9.40 in London and is reviewed annually to ensure it reflects the cost of living. Organisations such as EDF Energy and UBM are just two of those that have committed to pay the voluntary living wage so far this year.
So, is the new national living wage a positive step, which will result in numerous workers receiving a pay rise?
Will it give a much-needed boost to many low-paid employees’ wage packets and end wage stagnation?
Will it be overshadowed by the voluntary living wage?
Or will the additional cost burden ultimately prove to be detrimental to employees as employers seek to cut costs elsewhere?