Deciding what level to set the minimum wage at can’t be easy. Aside from the political implications, the government needs to ensure that employers pay a reasonable amount without causing unemployment, inflation and economic stagnation (which explains why it created the independent Low Pay Commission to advise on what level is sensible).
It seems that the £7.20 per hour National Living Wage announced by George Osborne in the summer budget treads the balance fairly well. According to a report published by the Resolution Foundation today, the impact of the new rate on many businesses' costs will be ‘modest’.
The research found that most employers would see their wage bill go up by 0.6% or less when the new rate comes into effect next April. The country’s total wage bill will increase by £1.5bn, or 0.2%, the report found.
‘Pay rises don’t come for free, and the expected rise will take the wage floor into uncharted territory,’ said Conor D’Arcy, a policy analyst at the Resolution Foundation. ‘But with the economy getting stronger the vast majority of employers should be able to afford the new higher wage floor, which will allow their lowest-paid staff to share in the recovery.’
The report did admit, though, that the measure will affect some businesses much more severely than others. Almost half of affected employees work in hospitality, retail and ‘support services’ like administration. Employers in these industries will see their wage bills grow by a much faster rate – hospitality companies can expect theirs to go up by around 3.4%. That probably explains why the likes of JD Wetherspoon have been kicking up a stink.
Small businesses will feel the pressure particularly acutely – those employing fewer than 9 will have to pay their staff an additional 1.5%, compared to just 0.6% for those with more than 250 workers.
‘Past warnings about the negative effects of the minimum wage on employment have been wide of the mark, but the size of the increase in the new wage floor will certainly be challenging in sectors such as hospitality, retail and care,’ said D’Arcy. ‘It’s not yet clear how employers will respond but, while some may opt to reduce hours or new hires, past experience tells us that most absorb the pressures via some combination of small increases in prices, a dip in profits and productivity gains.’
So overall, the new wage rate will be difficult for some to burden but won’t exactly bring the economy crashing down around us.