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NLW could impact private sector businesses’ productivity

A large number of private sector businesses will need to overcome significant productivity challenges in order to cope with the cost of implementing the new National Living Wage (NLW), according to new research released today.

The research, conducted by the Social Market Foundation in partnership with Adecco Group UK & Ireland, analysed the potential impact of the new rate on businesses across the UK. It found that:

  • The new NLW affects a quarter of private sector employees – more than double the proportion of employees in the public sector
  • Retail, wholesale and hospitality sectors are among the most severely affected by the NLW
  • Almost a fifth (18%) of employees who will benefit from the new rate are younger workers, and workers aged 50 or over make up a third. The NLW cut-off at age 25 means businesses will be faced with potential discrepancies in wages across their younger workforce
  • Part-time workers make up around half of the workforce in severely affected workplaces

The new research highlights that, for 40% of workplaces severely affected by the NLW, financial performance is a key factor in determining pay, while 47% have traditionally linked salary decisions to the minimum wage. This raises important questions about how these organisations can equip themselves and their staff to cope with rising wage bills.

28% of workers who will benefit from the new NLW are in elementary occupations which require no formal qualifications. Typical job roles include labourers, cleaners and shelf-fillers. Caring, leisure and other services and sales are also significantly affected. Four in ten of those who benefit from the NLW have no qualification or are only educated to GCSE level.

Workplaces severely affected by the new rate are much less likely to provide ongoing training and development opportunities to their staff, with 46% providing no training at all, or providing training to less than a fifth of their experienced staff in a six-month period. The prevalence of part-time workers may also present particular challenges to businesses because the case for investing in their skills may be weaker than for full-time workers.

Nida Broughton, chief economist at the Social Market Foundation, said, “The low stock of skills amongst those affected, and the relative lack of access to in-work training, means that businesses and the Government will have to act to make sure that workplace productivity rises alongside the new regulated wage.

“If businesses can increase productivity there is less likely to be a risk of higher unemployment as a result of the introduction of the NLW, and workers will be more likely to benefit.”

Alex Fleming, managing director and member of the board of directors at Adecco Group UK and Ireland, said, “The National Living Wage has the potential to reduce wage inequality and improve people’s lives across the UK. The challenge for businesses, particularly in sectors including retail, wholesale and hospitality, will be in mitigating the impact of the new rate across their workforce and boosting productivity to avoid job losses.

“Businesses should consider training as one of the best ways to respond. Many workers eligible for the rate are low-skilled with little further education beyond their GCSEs. This research shows the value of investing in training and skills for long-term.

“It is crucial that employers consider what these changes mean for them, rather than relying on a one-size-fits-all analysis of any potential impact.”

Workplaces severely affected by introduction of National Living Wage:

Occupations severely affected by introduction of National Living Wage:

Proportion of affected employees by age:

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