Impact of future targets for the National Living Wage: IDR research report for the Low Pay Commission
The Low Pay Commission (LPC), which advises the government on the level of the National Living Wage (NLW) and National Minimum Wage (NMW), has today published a detailed report on its recommendations for the 2022 statutory minimum, which were announced as part of the autumn Budget in October. This will see the NLW for all workers aged 23 and over increase by 59p or 6.6% to £9.50 an hour from 1 April 2022 – a much larger increase than the 2.2% implemented earlier this year, when employers in many low-paying sectors were contending with the economic consequences of the pandemic. Meanwhile, the minimum rates for those aged below 23 are also set to increase substantially, with particularly strong increases for workers aged 21-22.
In making its recommendations, the LPC considered evidence from various sources including a range of official economic indicators and forecasts, as well as stakeholder feedback obtained from a consultation with employers. It also commissioned six independent research reports, including a qualitative study by IDR looking at the experiences of 16 employers from four key low-paying sectors: retail, hospitality, leisure and social care. Our research focused in particular on the implementation of the 2021 uprating (to £8.91), the effects of the initial expansion of the NLW to workers aged 23 and over, and the impact of the pandemic on pay and labour supply issues.
Our research found that, despite the comparatively low increase in the NLW that took effect in April, the median minimum pay rate across the sample remained equal to the statutory floor at £8.91. However, three employers were able to create or reinstate differentials between their minimum rates and the statutory minimum, while the average and upper-quartile differentials with the NLW were greater than last year, when we conducted a similar exercise on behalf of the LPC. Yet even with this year’s smaller increase, several employers voiced concern about the potential for wage compression (as a result of pay freezes or lower awards than usual for the wider workforce), with some reporting that their highest hourly rates, eg for team leaders or supervisors, are now encroaching on first-line manager salaries. Pressure on differentials is causing particular problems for organisations in sectors such as social care, where some struggle to encourage staff to take on greater responsibility for rewards that are perceived as insufficient.
None of the case study organisations reported that they had reduced terms and conditions, such as unsocial hours premia, to ease pay pressures resulting from the rising NLW – largely because employers had already achieved any cost-saving opportunities that could be derived in this way. However, some savings had been made through greater use of technology, particularly in the social care sector.
The research also looked at the use of youth rates, in light of the expansion of the adult rate to include all workers aged 23 and over (previously 25) from this April and the proposed further expansion to all workers aged 21 and over by 2024. Less than half the sample (seven organisations) use youth rates and these are predominantly in the hospitality industry, where age-related pay is commonplace. Just two of these follow the current structure of the NMW, with three separate rates for workers aged 22 and below.
Many of the case study organisations are in essential services and as such were able to continue operating through the pandemic. Several such businesses awarded non-consolidated ‘thank you’ payments to staff who continued to work on the front line. Meanwhile some of the hospitality and leisure businesses that were shuttered during the lockdowns paid premium rates to the skeleton staff that maintained operations during these closures.
The current goal for the NLW is for it to reach two-thirds of median earnings, currently forecast at around £10.60, in 2024. Few of our case study organisations have started to plan for this by modelling pay increases over this timeframe. Rather, recruitment and retention issues are a greater preoccupation: the re-opening of the economy put particular pressure on employers in the hospitality and leisure sectors, while those in essential retail and social care are seeing their initial labour market advantages here starting to slip away. Several organisations, from various sectors, reported that the pandemic and, in some cases, extended periods spent on furlough had prompted staff to retrain and/or reassess their career options.
Experiences of labour supply problems have differed by sector: within hospitality, the pandemic is felt to have exacerbated existing staffing difficulties in various ways – for example, distance learning led to a reduction in the usual student workforce in some university towns. There is some evidence of increased pay rates in this sector but other hospitality firms have sought to tackle the problem by multi-skilling or retraining staff or by moving workers between branches. That said, since this research was undertaken, we have observed comparatively high general pay awards at some hospitality companies and could yet see other firms follow suit. The leisure sector meanwhile has found seasonal roles harder to fill than normal, with similar evidence of organisations using multi-skilling to tackle gaps in some cases.
The social care sector enjoyed an initial ‘COVID bounce’ in staffing while non-essential businesses were shuttered but labour market pressures have strengthened here with the re-opening of the economy. Employers in this sector often have less scope to tackle recruitment and retention difficulties through pay measures due to their reliance on fixed local authority funding for income. Nonetheless, some of our case study organisations have differentiated pay by location or (complexity of) service area and are looking to make more of career progression opportunities. Within retail, recruitment pressures are more acute for logistics roles than for frontline staff on the lowest pay rates.
The LPC’s full report and six commissioned research reports can be found on its website.