getting ready for a higher wage floor

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Getting ready for a higher wage floor Tackling Britains low pay and productivity challenge

Faisal Islam, Sky NewsDavid Norgrove, Low Pay CommissionCharlie Mayfield, UKCESRebecca Riley, NIESRAbigail McKnight, LSEMatthew Whittaker, Resolution Foundation

#livingwage / @resfoundation

Taking Up The FloorExploring the impact of the NLW on employersMatt WhittakerSeptember 2015@mattwhittakerRF2

3A quick recap

Measuring the impact on employers

Working towards successful implementation

Taking Up The Floor

A (very) quick recap of what it is & who gets it4

5National Minimum Wage (NMW) compulsory (adult rate covers all 21+)level recommended by LPC (raise pay in affordable way)

Living Wagesvoluntary (campaign based)needs-based principle (raise pay to boost living standards)

National living wage (NLW)compulsory top-up to NMW from April 2016 (for 25+)rate based on bite not cash level

A quick reminder of what the NLW is (and isnt)

6The 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

7With 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

3.2 million directly affectedbrought up to (or above) the new wage floor

2.8 million indirectly affectedalready 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 410reduced by taxes and by loss of benefits for some8With around one-in-four employees expected to have their pay boosted by 2020

Measuring the potential impact on employers9

Impacts will varyindustryfirm sizepublic/private sector

Focus on three metricsproportion 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 felt10The magnitude of the change especially by 2020 is likely to raise new challenges for (some) firms

11Coverage 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

12Bite 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

13Wage 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

14Can 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

15Can 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

16Can 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

17Pressures 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

Private sector firms more affected2020 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 capparticular issue in local authorities where 20% of employees will be affected by 2020 (just 8% in central government)

18Private sector firms face larger impacts on average, but public sector pay cap adds to the challenge for LAs

Working towards successful implementation of the NLW19

Impacts appear greatest in hospitality, retail, care and cleaning

Smaller firms look more exposed than bigger ones

Business has adapted in the pastemployment (staffing, hours, under-25 substitution)pay (non-wage compensation, pay compression)pricesprofitsproductivity

But the scale of the NLW takes us into new territory

20The NLW will have a modest impact on many firms, but poses a greater challenge for some

Employermust meet own commitments in tight environment

Fundersocial 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 businesshelping firms to boost productivity

21The government has a clear role to play in ensuring the NLW succeeds

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