National Living Wage Has Not Led to Job Cuts


July 2016

National Living Wage Has Not Led to Job Cuts

Despite warnings that the introduction of the ‘National Living Wage’ would lead some companies to cut jobs in order to make up the shortfall, a study has shown that instead, they are responding in other ways.

The research, consisting of a survey conducted by the Resolution Foundation, the think tank behind the initial conception of a National Living Wage, suggests that rather than cutting jobs, businesses are typically responding to the increased expenditure by either increasing prices, or simply accepting reduced profit margins.

The think tank said: “Our analysis of early employment indicators and our survey of employers supports the conclusion of much previous research on the NMW: reduced employment does not appear to be the primary response employers make to a rising wage floor.

Though, of course, we cannot predict precisely how employers will move forward as the NLW increases further, especially with the uncertainty surrounding the UK’s departure from the EU, our survey suggests that lower employment represents the primary strategy for only a handful of employers.”

The Resolution Foundation surveyed 500 separate employers, and found that just 35% of those surveyed said that their wage bill had increased as a result of the introduction of the National Living Wage.

43% said that the introduction of the National Living Wage had not affected their wage bill and that they did not expect it to, while 16% said that it hadn’t so far but that they “expect it to do so in the future”. Only 6% of respondents said that it had affected their wage bill “to a large extent”.

Altogether, they found that 215 companies were “affected by the NLW [National Living Wage]”. Of these companies, when asked what action they had taken to “manage additional wage costs”, the highest proportion (36%)  said that they would be increasing prices for their products or services.

The next highest proportion, 29%, said that they would simply be taking less profit and reinvesting more into the business. Other responses included ‘asking workers to do more’ (16%) and investing more in training (15%) and technology (12%).

These latter two options - investing more in training and technology - are considered as ways of developing a higher skilled and more effective workforce, increasing the productive output per paid hour of each worker. In terms of technology specifically, further development can be seen in two separate ways - as labour enhancing (increasing productivity of each worker) and labour replacing (“requiring fewer hours of labour because technology allows a task to be done more efficiently”).

Of those surveyed, 14% said that they would be “using less labour”, but more often than not this meant trimming a few hours off of each workers’ commitments, rather than actually abandoning some staff members altogether.

Just 8% said that they would be hiring more staff under the age of 25 (since the NLW only applies to those over 25) in order to balance their books. Another 8% said that they would be changing staff pay packets, including reducing over time pay and bonuses.

12% said that they would be taking no action whatsoever and 6% didn’t know what action they would take.

All of this, at least so far, seems to go against warnings that the introduction of the NLW would lead to job losses. The OBR claimed recently that they expect 60,000 jobs to be lost by 2020 as a result of the NLW, which is set to increase in coming years.

The Resolution Foundation’s findings do not wholly contradict that though, partly because the NLW has only been in effect for a few months, and partly because the research was conducted prior to the EU referendum, which they say would well affect the government’s wage policy in months and years to come.

Indeed, Conor D’Arcy, policy analyst at the think tank, said: “Brexit is likely to reshape the landscape in which many low-paying sectors operate.”

They expect that the gradual increasing of the NLW may well slow as a result of the vote to leave the EU. This is because it’s growth is tied to average wages across the country. Wage growth recently has been relatively stable but also relatively slow, and the expectation is that it will continue to slow while the economic outlook for Britain remains uncertain and companies refrain from adding to their wage expenditure and slow down hiring processes.

The true effect of the National Living Wage, regardless of the referendum result, can only truly be known a bit further down the line, the Resolution Foundation acknowledge. Nonetheless, the short term findings do paint a slightly more positive picture than some has expected immediately following its announcement.