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The National Living Wage - helping or hindering our economy?

 

Posted on 2 June 2017

The National Living Wage (NLW) was first introduced in April 2016. For employees over the age of 25, the NLW is currently set at £7.50 per hour and was projected to rise to at least £9 per hour by April 2020. The NLW was designed to improve the general health of our economy and the people in it which, in theory, should benefit all.

Great news for employees including those unaffected directly, as many employers have needed to upgrade their entire pay structures as a result of a few rises to those eligible for NLW.

However, you may be wondering, what does this mean for the employers? It is reported some 70,000 UK companies were already facing significant financial stress prior to the introduction of NLW. Whilst many companies found the first two rounds of NLW rate rises could be partly absorbed through working efficiencies and compensating sale price rises, some small businesses found they had to absorb the increased wage bill. That’s certainly increasingly likely to be the case for future NLW rate rises as efficiency gains have been optimised and further sales price increases risk reduced sales volumes. Profits, therefore, are being squeezed.

Whilst working across most sectors, here at Smith Cooper we have particular expertise in a number of industries such as hospitality and food and drink. In the latter category, wage bills generally amount to 25- 30% of total sales and so NLW increases have a big impact. Undoubtedly, profit margins are taking a hit.

Some relief was secured late last year when industry bodies, The British Hospitality Association and The Association of Licenced Multiple Retailers, won the battle to have the NLW increases set, independently from political interference, by the Low Pay Commission.

This has the effect of slowing the rate of NLW increases so that the rate is set to rise to 60% of median earnings by 2020, instead of the political target of £9. This will hopefully allow the industry to plan better and avoid wage rises jeopardising existing jobs, or the creation of new jobs. Nevertheless, the Labour party manifesto promises a NLW of £10 by 2020 - so the whole issue is still in a state of flux.

The Low Pay Commission, in charge of establishing rates for National Living Wage, reports employment is so far continuing on an upwards trajectory in many low-wage sectors, directly contradicting warnings from economists over the NLW's potential to cause job losses to fund the increase. In the long term, one can’t help but think that the combination of NLW and a restriction on immigration will cause the hospitality and retail sectors (amongst others) to find new ways of serving customers that don’t involve humans.

In conclusion, the worst fears about the impact of the NLW have been confounded so far, particularly in sectors which are traditionally low-wage such as hospitality and retail food and drink. Whilst economic uncertainty surrounding wages still lies ahead, the long term impacts remain to be seen.

If you would like any further advice on how the economy is affecting your business, or other Corporate Finance related topics, please feel free to contact one of our Corporate Finance team.

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