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Lack of clarity on NLW rate could put business investment at risk, warns report

A report released today by the Social Market Foundation (SMF) think-tank, in partnership with Adecco Group UK & Ireland, has warned that employers need greater clarity on the future of the Government’s National Living Wage (NLW) if they are to invest in measures to improve productivity and offset the cost of the new rate.

 

The report argues that the Government’s twin target for the NLW rate (introduced on the 1st April 2016) risks creating uncertainty and potentially undermining business investment and its own objective of increased productivity and skills.

 

 

The Government’s stated goals for the National Living Wage

 

There are currently two stated goals for the NLW:

 

  • an ‘ambition’ for the rate to hit 60% of median wages in 2020; and
  • an ‘objective’ that the rate should reach £9 in 2020

 

However, current uncertainty over earnings growth in the future means it is possible that 60% of median earnings will not equate to £9 in 2020. In July 2015, the OBR forecast that 60% of median earnings would equate to a cash target of £9.35, but this was downgraded to £9.30 (November 2015), to £9.16 (January 2016) and then to £9.00 (March 2016).  The uncertainty over earnings growth in the future means that it is quite likely that 60% of median earnings will not equate to £9 in 2020.

 

The report therefore calls on the Government to confirm whether the £9 NLW cash target for 2020 remains an objective so that employers can plan effectively.

 

 

Drawing on analysis of the Labour Force Survey and the Workplace Employment Relations Survey, the research describes the nature of the challenge facing employers. Key findings from The New Going Rate: the impact of the National Living Wage on UK employers’’, include:

 

  • Workplaces most severely affected by the introduction of the NLW have higher wage bills than other employers – meaning that it will be difficult for them to absorb the costs of higher hourly wages – and many operate in highly competitive markets, where raising prices to offset the cost of the NLW may not be viable.

 

  • The introduction of the NLW comes at a time when employers are facing significant other regulation and costs, including auto-enrolment of employees into workplace pensions and the Apprenticeships Levy.

 

  • Many employers affected by the NLW will need to increase productivity to meet the costs of rising wages.

The report argues that the introduction of the NLW to 2020 presents the UK with a ‘once in a generation opportunity’ to drive innovation and new business practices, including:

 

  • Increasing levels of capital and business investment in technology and machinery, areas where the UK economy has historically underperformed.

 

  • Addressing the worryingly low skills levels, with four in ten of affected workers educated to GCSE level or below. 

 

  • Addressing the widespread problem of skills under-utilisation in UK organisations. This should also involve changing human resource management from a high churn, low-skills operating model towards an approach which maximises the latent skills of workers and attaches greater value to career and skills development.

 

Policy recommendations from The New Going Rate: The impact of the National Living Wage on UK employers:

 

  • Given the speed of wage change and the challenges faced by employers, the report recommends that the Government consider implementing new ‘Transition Finance’ to aid productivity investment between 2016-2020. This ‘Transition Finance’ could assist organisations, especially smaller employers, as they seek to invest in skills, new technologies and more efficient work practices to help them adapt to a rising wage bill. This could include working with the British Business Bank to look at how to temporarily expand access to finance schemes such as the Enterprise Finance Guarantee.

 

  • The Government should provide certainty to employers and clarify whether the ‘objective’ for the NLW to reach £9 by 2020 would still stand if this cash figure is above its target of 60% of median earnings.

 

Nida Broughton, SMF chief economist and co-author of the report, said, “The scale of the challenge for employers posed by the National Living Wage is immense. Employers will have to grasp the opportunity to improve productivity in their organisations by investing in skills and new technologies – and to do this above all they need certainty about the task ahead.

 

“Lack of clarity on the new National Living Wage rate to 2020 will only make it harder for employers to plan ahead and make the vital investment needed to meet the Government's vision of a high productivity, high wage economy.”

 

Alex Fleming, managing director and board member at Adecco Group UK & Ireland, commented, “Businesses operating in the UK demand one thing from Government. Certainty. Certainty about the investment decisions they make. And certainty about the wages they are required to pay.

 

“The new National Living Wage has the potential to transform the employment landscape in the UK. The challenge for employers is to absorb this new rate in a way that does not have a significant impact on their bottom line and workforce. This excellent report provides a number of clear ways to do this, from investing in skills and diversifying their workforce to fundamentally re-evaluating the way they approach HR.

 

“In return, the Government needs to be clear on the rate that they are expecting businesses across the UK to pay, so that they can properly plan for the future.”

 

Adam Marshall, acting director general of the British Chambers of Commerce, added, “This report is right to say that the new National Living Wage poses risks to many businesses, who face an uncertain economic environment and other high up-front costs. 

 

“In the face of these concerns, the government must make a clear commitment to avoid over-burdening firms when it comes to future increases in the National Living Wage. Future increases must be proportionate, take account of other employment-related costs, and be based on clear and unequivocal evidence. 

 

“Low pay and low social mobility are real problems in Britain today, and business needs to play a role in solving them. Education, training and investment are the best way to drive higher productivity and higher wages - an outcome that's good for employees, businesses and the economy as a whole."

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