A blog from the LPC, based upon our 2020 research impacts of future NLW increases on employers.
By Fatima Dudhia, Posted on: 8 April 2021
Every year, the LPC commissions and publishes a number of independent research projects to help build our evidence base. The research for our 2020 Report was published in December.
Last year, we commissioned research from Incomes Data Research (IDR) to help understand the impacts of future NLW increases on employers. We asked IDR to gather evidence on employers' readiness to meet the Government’s targets and the adjustments they would have to make to keep pace with the increases. Given the outbreak of the coronavirus pandemic, IDR also focused their attention on the impacts of the pandemic on the lowest-paid and the wide use of the Coronavirus Job Retention Scheme (CJRS).
Each year we speak to a great number of stakeholders during our consultation, but commissioned research helps broaden this spectrum, ensuring we hear the views of a broad cross-section of stakeholders from a diverse range of sectors. With the pandemic causing the closures of many businesses, face-to-face meetings could not go ahead. Instead, IDR carried out telephone interviews with 26 employers between May and September 2020. The sample included employers from the private, public and not-for-profit sectors and a broad spectrum of industries, including hospitality, manufacturing, retail, engineering and business sectors. Using this evidence, IDR created case studies highlighting employers’ experiences of the pandemic and their views on future increases to NLW.
Many of the businesses IDR interviewed reported that successive above-inflation NLW increases had had significant implications for wage compression or differentials. This meant many employers in low-paying sectors had limited scope to offset any further increases by reducing employee terms and conditions, leading to more indirect efforts to manage their pay bill – for example, by implementing new pay structures.
The imminent changes to the NLW qualifying age (which moves from 25 to 23 this year) appeared to be of little concern to most of the employers interviewed, as few made use of youth rates, citing reasons of simplicity or fairness. Many organisations believed age-related pay was unfair and so chose not to use it.
There was also evidence of a greater use of technology and multiskilling, with the inference in some cases that employers would expect more (in terms of level of skill or flexibility) from staff on the lowest rates of pay.
The shock of the pandemic hit businesses and workers alike - either being key workers and working long hours, placed on furlough, or made redundant. Employers were concerned about a large increase in April 2021, given the state of the economy. They also emphasised the importance of flagging increases well in advance, to allow for better planning and preparations, a serious challenge this year in particular.
There was some hesitation from organisations looking to make decisions on pay in the future as the current economic situation itself was of more concern. This meant a large number of organisations were not considering the impact of future increases in the NLW.
Most employers interviewed elected to continue implementing similar pay increases to previous years. However, seven employers chose to freeze or defer any pay increases for some or all groups of staff due to the inactivity of businesses and impacted revenues following the coronavirus pandemic. Only one organisation had decided to increase its lowest rates by more than the value of the NLW increase (to Living Wage Foundation rates), with most uprating in line with the NLW.
As noted above, the implementation of successive above-inflation NLW increases has led to a compression of wages amongst employees receiving the lowest rates of pay. Within many of the organisations IDR interviewed, the differences in pay between staff on rates at or close to the level of the NLW and their immediate superiors have been squeezed or eroded altogether. Employers told IDR they had no other option but to compress pay as they have already exhausted other options such as eliminating workplace benefits including overtime as a means to cope with the increase in NLW.
It is clear from IDR’s research that many organisations believe any further above-inflation increases to the NLW could be difficult for them to absorb and they would benefit from being given ample time to prepare for increases in pay which could potentially affect the way in which they operate, by the Government bringing forward its announcements.
We will continue to explore these themes further through this year’s evidence strategy and annual consultation.