HR 18 August 2020

How will businesses respond to the Government’s pledge to increase the minimum wage in 2024?

How will businesses respond to the Government's pledge to increase the minimum wage in 2024?
Government pledge to increase the minimum wage in 2024

While the National Minimum Wage (NMW) has helped tackle low pay, it has had little impact on reducing in-work poverty. When the National Living Wage (NLW) was introduced in April 2016, low pay reduced even further, yet a large proportion of workers still earn below the real Living Wage and, rather than a reduction, there has been an increase in in-work poverty.

Initially, there were concerns that some employers would struggle to meet the higher wage bills and be forced to cut staff. However, employment actually saw a significant increase and, pre-coronavirus, was at a record high.

The latest report (published August 2020) from the Learning and Work Institute explores employer perceptions of the planned increase to the NLW, and how employers may respond, particularly in light of the new challenges they face from the coronavirus pandemic.

What is the minimum wage?

The minimum wage came into force in the form of The National Minimum Wage Act in April 1999.

In 2015, the new Conservative Government announced their plan for a National Living Wage (NLW) in the form of a higher wage for employees aged 25 and over.

Today, the NLW is:

£8.72 for those aged 25 or over
£8.20 for 21-24 year olds
£6.45 for 18-20 year olds
£4.55 for 16-17 year olds
£4.15 for apprentices

The minimum wage is widely considered to be one of the most successful policies in recent years. Its introduction led to a substantial reduction in extreme low pay, without negatively impacting employment levels.

Read more: “She only makes teas” – The worst excuses for underpaying staff revealed

How is it set?

At the same time as the minimum wage was introduced, the Low Pay Commission (LPC) – made up of representative employers, trade unions and economists – was set up to advise the government on the minimum wage level.

Part of the responsibility held by the LPC is to review and recommend NMW and NLW increases, with a key element of their responsibilities being to strike the right balance between recommended increases and avoidance of job losses and unemployment.

What’s happening to the National Minimum Wage in 2024?

With the minimum wage so far managing to maintain wide popular support, the current government has committed to further increases with the intention of reaching two thirds of median earnings by 2024, as well as extending it to all employees aged 21 and over. At the time the pledge was made, this was projected to be £10.50.

However, although the government announced this pledge when employment was at a record high late in 2019, now the impact of the coronavirus pandemic is starting to become clear and the associated expected unemployment will almost certainly affect their plans.

How will businesses respond if the increase goes ahead?

In March 2020, at the outset of the coronavirus lockdown, the Learning and Work Institute conducted a survey exploring business perceptions of the minimum wage and the 2024 plan to increase the National Living Wage.

UK businesses anticipate the following changes will be required in response to the planned increase in 2024:

  • 21% plan to pass on cost to customers with price increases
  • 15% plan to hire fewer staff
  • 10% plan to hire more workers on temporary or flexible contracts
  • 10% plan to reduce or change staff benefits
  • 9% plan to increase staff training to increase productivity
  • 6% plan to reduce or remove supervisor or managerial roles
  • 6% plan to reduce training budgets
  • 6% plan to reduce hours (staff hours and/or operating hours)
  • 50% don’t expect to require any changes to accommodate the cost
  • 9% don’t yet know what they will do, or if they will need to make changes

These findings are particularly interesting when compared to how businesses actually responded to the original introduction of the National Living Wage in 2016 which, at the time, represented a significant hike in staff costs for workers aged 25 and over.

  • 16% passed on cost to customers with price increases
  • 12% changed working practices to increase productivity
  • 12% hired fewer staff than they might otherwise
  • 11% hired more workers on temporary or flexible contracts
  • 10% reduced or changed staff benefits
  • 6% reduced or removed supervisor or managerial roles
  • 5% reduced training budgets
  • 5% reduced hours (staff hours and/or operating hours)
  • 46% made no changes to accommodate the cost

Four sectors stand out

  1. Hospitality and leisure: most likely to take action, with 43% expecting to pass on costs and 27% to hire fewer staff members
  2. Medical and health services: 13% more likely to reduce or remove managerial roles
  3. Retail: 12% more likely to reduce or remove managerial roles
  4. Manufacturing: 17% more likely to reduce staff benefits such as bonuses, pensions or breaks

These four sectors are the ones hardest hit by the COVID-19 crisis, making the findings especially concerning.

What support do businesses want from the Government?

While 17% of businesses surveyed didn’t think the Government should provide any support to employers in the event of the intended rise, 37% want help to invest in skills and training, 33% would like to see enforced temporary reductions in national insurance or other employer taxes and 31% would like to see more business advice and support.

Unsurprisingly, only 9% of low-paying businesses believe the Government should take no action to support companies in light of the National Living Wage increase.

Effect on the economy

The wider economic and labour market today are very different than they were when the Government committed to increasing and extending the NLW. The coronavirus outbreak, and the measures taken by government to prevent the spread of the virus, will have a significant and lasting impact on the economy.

In the majority of interviews with employer representatives, the survey reports the most recent increase in the minimum wage had been tricky to manage for many employers. Now coronavirus has made businesses even more vulnerable, future plans look even more difficult to navigate.

How the economy recovers from the current coronavirus recession remains to be seen, as does whether the Government will meet their target for an increased National Living Wage in 2024.

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