An update on the National Living Wage - The Winners and Losers  

The Winners

• Female workers represent a third of affected employees, reflecting the higher concentration of female workers in low paid or part time positions (Source: The Resolution Foundation).
• Age groups 25-30 and 66 and over will benefit disproportionately to other age groups (Source: The Resolution Foundation).
• Private sector workers will feel the majority of the impact and represent an estimated 78% of the affected 6m workers. The average increase in salary costs by 2020 is estimated at 0.8% and 0.2% for private and public sector companies, respectively (Source: The Resolution Foundation).
• Employees outside of London will be most affected. While 14% of the workforce in London will be impacted, this rises to 25% in most other regions (Source: The Resolution Foundation).
  

The Losers

• It is estimated that the introduction of the NLW could drive an increase in the unemployment rate by 0.2 percentage points in 2020. This equates to c.60,000 job losses and 4m fewer hours worked per week across the UK economy (source, Office of Budget Responsibility).
• Private sector businesses with less than 10 employees will feel the greatest impact from the NLW with around 36% of their employees being impacted and resulting in an average estimated increase of 1.5% to their total wage bill. This compares to 21% of the workers in large private sector firms with staff between 250 – 4,999 being impacted and resulting in an average estimated increase of 0.6% to their total wage bill (source, The Resolution Foundation).
• While wages will increase for those affected, there may be a net reduction in total income for some, as 26% of households impacted will also see a negative impact from benefit cuts (source, The Resolution Foundation).
  

Response to the NLW?

While there is significant support for the NLW due to the positive impact it is expected to have on morale, productivity and staff retention, the ability to mitigate costs will determine the impact on businesses.

Employers have commented on how they expect to react to their higher wage bills:

• Raise productivity/efficiency
• Raise prices
• Reduce overtime and bonuses
• Reduce the number of employees
• Absorb the cost impact and accept lower profits

In addition, the government is urging UK companies to take steps now to prepare for the introduction of the NLW specifically to identify which employees are eligible, ensure their payroll systems are set up to make the necessary adjustments on 1st April 2016 and communicate the changes to their staff.

In Summary

Those companies with high levels of minimum wage workers are most exposed to the NLW and have had 6 months to consider their response.

The reaction of management teams will be critical to determining the winners and losers, specifically assessing how margin and profitability can be maintained and establishing action plans to do so. We anticipate that the winners will be companies who are able to withstand margin pressure by either passing on the higher costs or realising cost efficiencies. The losers, on the other hand, will likely be smaller companies and those sectors who have limited or no flexibility to either absorb or pass on the higher costs, resulting in a greater chance of fallout in the form of consolidations, restructuring and in some cases, insolvency.

We will continue to monitor this issue and track companies who are most exposed with the aim of keeping you updated as the NLW comes into effect.