When George Osborne and Iain Duncan Smith unveiled the National Living Wage back in July, to come into force at £7.20 per hour for the over 25s in April 2016, it outstripped Ed Miliband’s promise on the NMW. The aim was also to ensure that “work always pays” so that wages are well above benefits. Given that many SMEs operating in service industries like caring, can only pay the NMW because their customers drive prices down so hard, you can be forgiven for wondering what on earth a Conservative majority government was thinking.
Both sides of the political spectrum have their views. Former Sainsbury’s chief executive Justin King has argued that the NLW will lead to job losses as companies’ costs go up and they decide to focus on increased productivity rather than expanding the workforce. Having said that Sainsbury’s has recently announced it would give 137,000 of its employees a pay rise bringing pay for over and under-25s well above the NLW figure for April 2016.
Frances O'Grady, the TUC’s general secretary, has hit back from the other direction. She claims that the government’s plan risks putting the over-25s out of work and encouraging companies to take on younger workers at lower rates. These are both valid concerns.
Good employers will often pay what they can afford. The point is there may be times when they can’t afford it. Smaller companies providing low-cost services (particularly care services to the public sector) may find themselves priced out of the market, and larger companies that still have money worries will be looking for ways to do the same amount of work (or more) with fewer people. There is no minimum wage for machines, and where technology exists it is often people who are the first to go. With a target of £9 per hour by 2020 companies could send their longer-term planning in a different direction, making it harder for the government to achieve another two million jobs by the end of this Parliament.
We will have to wait and see whether this approach makes work pay, or whether more people end up out of a job. Some have argued that if employment falls because of this increase, more people may end up on benefits and there could be less income tax revenue to support them. This probably won’t be the case as the income tax threshold will soon reach the level people would earn on a full time NLW salary, but it won’t help fund extra benefits the government finds itself having to pay.
Minimum wages have risen before, and the nation has survived. The economy might draw a sharp intake of breath, but in the long-term we will probably cope. It is the short-term that could see difficulties for some companies. In a country where we don’t like paying very much for services (unlike Scandinavia for instance) and the focus is always on cost-cutting, the low-paid service provision sector could suffer.
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