Employers facing significant increase in wage bill for National Living Wage

The cost to employers of implementing the new National Living Wage will be significantly higher than official estimates with towns and cities outside of London and the South East disproportionately affected, according to new analysis. The Chancellor George Osborne announced in the summer budget in July 2015 that a new, compulsory National Living Wage would be introduced from April 2016 for workers over the age of 25. The initial rate will be £7.20 per hour, rising to £9 per hour by 2020.

Professor Stephen McKay, Distinguished Professor of Social Research in the School of Social & Political Sciences at the University of Lincoln, used data from the government’s Annual Population Survey 2014-15 to calculate the real terms cost to employers of introducing the National Living Wage, segmented by geographic region and employment sector.

English regions due for the largest percentage increases in wage bills between now and 2020 are the North East (extra £625m in 2020; 3.7% increase); Merseyside (£513m extra; 3.7% increase); and Yorkshire & Humberside (£2bn extra; 3.7% increase). Northern Ireland (£480m extra; 3.9% increase) and Wales (£1.1bn extra; 3.6% increase) can also expect real terms cost increases proportionately far higher than those pending in London (1.6%) and the South East (1.9%). The average increase for the UK as a whole would be 2.7% – equating to an extra £20bn in people’s paypackets by 2020.The analysis also shows marked differences between the major industrial sectors. Jobs in retail, agriculture and health & social care will be among those most profoundly affected. Almost half of employees in the food and hospitality industry would see wages rise, with a percentage cost increase to employers of more than 10%. More than a quarter (28.9%) of staff in the health and social work sectors would benefit from higher paypackets under the National Living Wage – leaving employers to find an extra £3bn to cover the annual wage bill by 2020. Local authorities would need to find almost £1.7bn extra in their budgets to cover the wage increases, with the charitable sector facing a £500m annual cost increase within five years.

Unlike official estimates from the Office for Budget Responsibility (OBR), the analysis compares what employees are paid now with what they would be paid in five years time. This type of direct comparison “from now to then” enables assessment of real terms cost increases facing employers over the next five years. The OBR estimates the additional cost to employers at £4bn, incorporating predictions about wage growth, including rises in a hypothetical Minimum Wage, between now and 2020.

Professor McKay, an economist based in Lincoln’s School of Social & Political Science who began his career at the Institute for Fiscal Studies, said: “While the move to a National Living Wage is welcome, the cost to employers of implementing these wage increases must not be under-estimated, particularly in those parts of the UK where a significant proportion of the workforce are employed in local authority, health and social care or charity sectors. These are precisely the areas facing the largest percentage increases, with older workforces and a high proportion of people on or just above the current Minimum Wage.

“Budgets in these sectors are already under extreme pressure and further cuts in central grant funding are expected in local authorities and charities over the next five years. It is difficult to see how employers will find hundreds of millions of pounds to meet their additional wage costs in these circumstances. It would be a tragedy if the impact of the National Living Wage is the loss of public services and jobs.

“The effects on workers may appear to be positive in terms of higher earnings but their ultimate spending power will depend largely on what actions are taken on tax credits, which currently have an uncertain future.”