Conor D’Arcy: Consider the long-term consequences of approaches to the national living wage

ConorTeamHeadshot300Since its announcement last summer, the national living wage (NLW) has rarely been far from the headlines. Commentators have discussed its merits and demerits, but whatever your opinion, it is a big deal: the Resolution Foundation estimates that it will result in a pay rise for roughly 4.5m workers.

But pay rises do not come for free. In a survey the Resolution Foundation commissioned of 1,000 employers, conducted in September 2015, over half expected the NLW to raise their wage bill. The crucial question for employers will be how best to respond.

A simplistic economic model suggests that if you raise wages you reduce employment. But most evidence on the UK’s minimum wage suggests employment has not been adversely affected. And while some survey respondents said they intended to reduce either hours worked or staff numbers, it was not the most popular answer.

Encouragingly, the most common response was to increase the efficiency of their businesses, the best possible response for workers and the wider economy. For some that will mean making more of the skills of their existing workforce. Others will choose to focus on whether their pay structure, in terms of differentials and bonuses, is set up to motivate employees.

Beyond higher productivity, some firms were considering price rises but recognised the risk of losing customers. Given the NLW only legally applies to those aged 25 plus, hiring more younger workers is an option but few employers intended to rely on this, preferring instead to operate a strategy of recruiting the best candidate for the job. For some employers it would be business as usual, absorbing the extra cost through reduced profits.

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The survey also revealed that about a quarter of respondents had not decided yet. With April now not far away, it is vital that employers affected think through the long-term consequences of their strategy, rather than a short-term focus on cutting costs.

Conor D’Arcy is policy analyst at the Resolution Foundation