After the government announced the national living wage would go up by almost 10% in 2024, businesses in some sectors have called the rises unsustainable. Yet as a high proportion of workers struggle to afford the basic essentials, do employers not have a role in creating a more equal society? Jo Faragher examines the pay implications.
In April 2024, almost three million low-paid workers will receive a pay rise of almost 10%, as the national living wage rate rises to £11.44 an hour. The government’s statutory rate will also be extended to workers aged 21 and 22 for the first time.
With the cost of living driving thousands of lower-paid workers to use food banks or struggling to pay for basic necessities, the rise was welcome news. However, many employers have aired concerns that the implications for their wage bills could have knock-on effects.
Mike Iddon, chief executive of the Pets at Home retail chain, said the increase would mean an extra “unmitigated” £16 million on its payroll, when it had originally planned for an £8 million rise.
Alex Baldock, chief executive of Currys, claimed the increase – which comes at the same time as a hike in business rates – amounted to “blithely loading yet more costs on an already overburdened retail sector”, and would lead to fewer jobs.
At the same time, employers are struggling to recruit the right skills. According to the CIPD’s analysis, 52% of companies that felt last year’s national living wage rise had had a significant impact on their pay bill had hard-to-fill vacancies, compared with 38% of those who said their labour costs had not increased.
Impact of increases
The CIPD points out that some organisations are disproportionately affected by minimum wage rises, including the hospitality industry (43% said pay costs were impacted last year). Others, such as the professional services sector, are far less affected (64% said there had been no impact).
These impacts aside, the cost of living has become an urgent issue here in the UK. Last month, United Nations envoy Olivier de Schutter said that poverty levels in the UK were “simply not acceptable”, describing UK in-work benefits as “grossly insufficient”. But whose responsibility is it to turn this around – government or employers?
Each year, the government sets the rate based on recommendations from the Low Pay Commission, which was set a target for the NLW to reach two-thirds of median hourly pay by October 2024. In April, when the new rise takes effect, it will likely have hit this target.
LPC chair Bryan Sanderson has said that the organisation is “entering a crucial period for the national minimum wage, with major decisions impending over the policy’s future trajectory”.
A consultation into the future of the national living wage and the role of the LPC closed in June this year, but the government is yet to publish its response.
Fair distribution
Sheila Attwood, XpertHR senior content manager, data and HR insights, says it’s right that an independent body continues to monitor wage rates at lower levels.
“We have remuneration committees deciding whether CEOs get paid fairly at the top, so it’s right that there is scrutiny on the lowest paid too,” she says.
But she acknowledges that substantial increases at the lower end can create issues further up the chain. “Organisations do struggle with differentials when [NMW] increases are higher than they have given their other employees,” she adds.
“Suddenly they might become a minimum wage payer when they weren’t before, or find they have a supervisor who’s paid 10p more than the rest of their team. They need to ensure that there is fair distribution of the budget.”
It’s also worth noting that the latest rise in the government’s minimum rate edges it closer to the ‘real’ living wage, as set by the Living Wage Foundation – at least outside London.
There are now around 14,000 employers that pay this voluntary rate, designed to take into account cost of living pressures. This rate also went up by 10% in October, to £12.00 an hour outside London and £13.15 an hour in London. Some unions would like to see a national statutory rate of £15 an hour or above.
But while they admit it’s the “right” thing to do, many employers fear they can’t justify or sustain a bottom wage level that keeps increasing at such a rate.
“Heads of employer bodies moan about the rise but the past decade has seen the growth of zero-hours contracts and questionable practices such as fire and rehire,” says independent reward consultant Duncan Brown.
“We’ve had 10 years of maximising employers’ flexibility and minimising employment costs but during that time we’ve had more social inequality and worse poverty than ever before. You don’t break the productivity slump by being P&O.”
A ‘social’ wage
Tony Dobbins, professor of work and employment relations at the University of Birmingham, argues that the national minimum and living wage rates are insufficient as a stand-alone policy to address in-work poverty.
Instead, policy-makers need to work towards a ‘social’ wage that is not just about pay, but encompasses things like more available and affordable social housing, manageable utility bills and support to buy essentials.
“All of this used to be part of the social contract,” he says. “Now we have a lot of money going towards shareholder dividends. If there was some public service provision of life’s essentials, we wouldn’t need to raise wages as high.”
We’ve had 10 years of maximising employers’ flexibility and minimising employment costs.. but more social inequality and worse poverty than ever before. You don’t break the productivity slump by being P&O.” – Duncan Brown, reward consultant
Professor Dobbins cites examples of paternalistic companies in the 20th century such as Bourneville and Unilever, which provided housing for employees. “Today, this would be too dependent on employers being progressive, humane and compassionate, so the government needs to play an overarching role,” he adds.
“This is the case in countries in Scandinavia, for example, where higher taxes fund support with childcare and public housing. But even if a government was intent on resolving this here, there are huge problems in society to address first.”
According to the Resolution Foundation and LSE’s Centre for Economic Performance, 9 million younger workers in the UK have never worked in an economy with sustained pay growth.
At the same time, employees earning the lowest rates of pay tend to be those affected most by higher food and energy costs, because they have to spend a greater proportion of their income on necessities.
For businesses looking to attract a new generation of talent, paying employees fairly – no matter their level – is arguably a crucial element of their environmental, social and governance (ESG) strategies, however.
Investment in training
Brown argues that greater investment in learning and development by employers will help them to get a better return from pay increases, as well as address the skills shortages that are having a reactive impact on recruitment and wage budgets.
Interventions such as the apprenticeship levy have not made a dent in this training slump. Investment in learning and development has dropped by 19% since 2011, according to the CIPD, and learning investment per person is around half the EU average.
“It’s not just about the rate you pay someone but how you progress them through the organisation,” adds Brown. “We see this in lower-paid jobs in the NHS and need to see it in the care sector.
“We need a workforce strategy that means we can progress people through to where we have mid-level job shortages, creating a pathway through the progression. Pay goes up, skills go up, and the value employees provide goes up.”
The Labour Party has said it will introduce a Fair Pay Agreement in adult social care that could see the start of sector-specific pay bargaining, another measure that could begin to address inequality.
Sustainable approaches
But how should employers deal with the increase in the short- to medium-term?
A CIPD survey found that 30% of respondents accepted lower profits or simply accepted the higher overheads, 29% raised prices and 23% improved productivity through actions such as better supply chain management, boosting staff morale and engagement, or asking employees to do more as part of their role.
Charles Cotton, senior advisor at the HR body, says it has been easier to increase prices in recent months because consumers are already used to an inflationary environment, but this might not work in the long term.
“It’s not sustainable to keep passing on the cost of higher wages to consumers, so we have to think of ways to improve productivity and focus on smarter working,” he advises.
Larger employers in sectors such as hospitality have economies of scale so can look at ways to tweak business practices or introduce automation to improve productivity, he adds, but this may be more of a challenge for smaller businesses.
Pay structures
Employers could also look at how they structure their compensation, suggests Attwood at XpertHR.
One option is grading by salary, so lower paid employees get a higher percentage rise than those on bigger salaries, or offering all employees a flat rate increase. This would mean that, for example, everyone’s pay goes up by £1,750, which avoids making pay gaps between the highest and lowest paid even greater.
It’s not sustainable to keep passing on the cost of higher wages to consumers, so we have to think of ways to improve productivity and focus on smarter working.” – Charles Cotton, CIPD
Cotton agrees, pointing to the rise in employers offering cost-of-living payments in recent months, but adds a note of caution.
“When giving out these payments they can have an impact on people’s Universal Credit or other benefits, so HR needs to deploy a whole other skill set here,” he says.
Increasingly, employers will need to adapt their reward strategies to match the skills landscape, argues Duncan Brown.
“Skills-based pay is seeing a rebirth as the rate of training is not getting us to where we want to be,” he says. “Take electric vehicles, for example, we don’t have enough mechanics with the skills to deal with them, so however you look at it, you’ll have to pay.”
Higher value
“My hope is that businesses will start to think about how we can get a return on paying people more,” he adds.
“A high-performing person in a low-skilled job makes a difference but can run into barriers so there are limits. But there are some roles where people can add twice as much to the bottom line. We need more of these high value-add jobs.”
Organisations must also not lose sight of the bigger picture, concludes Professor Dobbins.
“A statutory minimum should be portrayed as a progressive factor in society,” he says. “If we look at the national living wage in isolation, it’s just not enough because the cost of living has shot up. With a higher living wage, we can move to a society with more of a level playing field, and we don’t do enough to help those ‘good’ employers who pay a bit more.”
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