Insights

The Living Wage

An uncertain certainty

Deloitte Restructuring Services shares initial thoughts on how the Living Wage will impact on various sectors across the UK.

George Osborne declared that "Britain deserves a pay rise" and unveiled a substantial rise in the national minimum wage as part of his Summer Budget 2015. Workers over the age of 25 will earn a minimum of £7.20 an hour from April 2016 (representing an 11% increase from minimum wage rates) and £9.00 an hour from 2020 (representing a further 25% increase from Living Wage rates as of April 2016), with rates higher in London. This move is expected to boost the wages of ‘up to six million’ people in both the public and private sectors (source: OBR).

While this is good news for minimum wage earners, there is considerable uncertainty about how this increase will impact businesses across the UK. At present we are in a post-recession economy, enjoying ample liquidity, low inflation and low unemployment levels, tempered by the real possibility of an interest rate increase in the next 12 months. Adding the impact of the Living Wage from April 2016 has economists, corporates, politicians and trade associations debating whether this is a positive step for the UK and what the impact will ultimately be on unemployment levels, productivity, innovation and investment.

Deloitte’s Restructuring Services team is keen to enter the debate and by drawing on expertise and insight from across Deloitte, we have captured some initial thoughts on the impact of the Living Wage on key sectors, specifically those with a high proportion of minimum wage workers. We will continue to monitor and assess reactions from corporates and our industry experts over the coming months and keep you updated as the impact of this legislation starts to crystallise.

Care Home sector

  • Staff costs represent c.60% of the cost base for a care home
  • The UKHCA believes an extra £750m may need to be put into the system next year to cope with the Living Wage demands
  •  Approximately 60% of care home residents funded by local authorities will now face an uncertain and challenging future as the sector sees a higher level of home closures

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Retail sector

  • Big supermarket chains and discount retailers are expected to be the hardest hit in the retail industry as a result of the Living Wage
  • Independent and small retailers will also likely suffer as they already have limited resources to invest in staff and employers will have to either cut working hours or spend more time in stores themselves

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Business Services sector

  • The Business Services Association is in full support of the Living Wage as it will provide clarity and consistency around pay in the industry
  • Large business services firms will be less impacted by the Living Wage than their medium/smaller counterparts because many of their long term contracts allow for price increases based on changes in government legislation
  • Small and medium sized business services companies will be most heavily impacted and will likely have to consider consolidation, restructuring or exiting part or all of their operations

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Agriculture sector

  • Within the agriculture sector, the labour-intensive horticulture industry is likely to be the most impacted by the Living Wage
  • The seasonal nature of the horticulture industry requires that businesses plan and budget well in advance of harvest. The Living Wage announcement has caught businesses in this industry off guard
  • The National Farmers Union is asking the government to assess the consequences to the farming industry with specific focus on the horticulture industry in the hope that the government will consider delaying implementation of the Living Wage

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Hotel sector

  • In response to the Living Wage, the tourism, hospitality and leisure sector will likely have to either reduce or stop bonuses, cut back on employee benefits or, the worst case, make redundancies
  • For larger organisations, a full re-evaluation of staff cost structures will be required to sustain pay levels between those on minimum wage and their supervisors

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Licensed Retail sector

  • Tenanted pub companies will not be directly affected by the Living Wage
  • Managed pub companies and restaurant operators will feel the greatest impact from the Living Wage as wages make up 30% of their cost base
  • The Living wage will likely lead to both an increase in prices across the industry and further investment in technology to improve productivity and efficiency

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Charity sector

  • By 2020, the Living Wage could cost the charity sector an additional £500m and will impact 250,000 people working in the charity sector
  • Social care charities will be the most impacted as their staff costs equate to 60% of turnover

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On Monday 27 July 2015, Deloitte’s Chief Economist, Ian Stewart, commented on the macroeconomic impact of the Living Wage in his Monday Morning Briefing. Read Ian’s thoughts on the potential long term effects of the Living Wage.
Read his weekly briefing

Looking wider than the Living Wage, Marcus Rea, the head of Restructuring Services Tax team has analysed who the winners and losers will be from the tax changes announced in the Summer Budget.
Read his analysis

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