The introduction of a National Living Wage next month is ‘leap in the dark’ which may put some smaller companies out of business, says an economics expert from the University of the West of England (UWE Bristol).
Associate Professor Felix Ritchie said there was a great deal of uncertainty about the impact of raising the earnings of the lowest paid by 50 pence an hour.
Dr Ritchie, who alongside colleagues at UWE Bristol has conducted extensive research on low pay in recent years, said large organisations would be better able to absorb the extra burden on their wage bills but smaller companies may feel the strain and be forced to fold or lay off staff.
He said: “The Government has acknowledged the new rate is a policy decision rather than a research-driven decision. It’s a bit of a shot in the dark and an experiment from the Government, which seems to be willing to accept the risks to employment to provide better wages for workers.
“In the short term, profits will be hit. Bigger companies will be able to absorb the changes but small individual businesses have less flexibility and will feel it most. It might be that some small businesses even fold and blame the new rate for that happening – it could end up being the straw that breaks the camel’s back.
“In the longer term, there is evidence that companies will find ways to adjust. This is what happened with the introduction of the minimum wage.”
The new National Living Wage of £7.20 per hour, being introduced on April 1, will replace the current minimum wage of £6.70 per hour for employees aged over 25. Chancellor George Osborne plans to increase the rate to £9 per hour across the UK by 2020. The blanket increase covers the whole of Britain, with no special rate for more expensive areas such as London.
Employees aged between 21 and 25 will continue to receive the £6.70 per hour, with those under 21 earning an even lower rate.
Dr Ritchie said another likely consequence of the move – announced in last year’s summer budget – was a knock-on pay increase for those currently on salaries just above the new National Living Wage threshold.
He said: “I expect employees on all the existing minimum wages to see their pay rising more steeply and there to be a ripple effect for those earning just above the new National Living Wage level. Overall, it should give people a bit more money and help families but the issue is – will people keep their jobs and will some employees be traded in for younger workers?
“The introduction of the National Minimum Wage was huge but this isn’t going to be as big a jump – the immediate impact won’t be as great. One area of major concern is social care – this is an industry that is already struggling, and they will find it hard to renegotiate contracts with councils.”
The academic also believes the introduction of a National Living Wage could cause resentment among workers already receiving a Living Wage through existing voluntary schemes, such as employees at Bristol City Council.
Dr Ritchie said: “Bristol is trying to be a UK Living Wage employer and the city council is requiring its workers – and organisations that work for it – to be Living Wage employees, so for lots of people in Bristol it might not change things. People like being on these voluntary Living Wage schemes, partly because it is special for them – it shows that your employer is willing to go beyond the legal minimum. But how are people going to react to it being rolled out everywhere?
“There was research done with the voluntary schemes – these rates are calculated by looking at what the average family needs to earn to live on. The new National Living Wage has just come out of the blue. It’s been based on minimum wages in other countries rather than thinking about how it will impact employees and employers in the UK.”
Dr Ritchie is director of Bristol Economic Analysis (BEA), a research centre based at UWE Bristol which has conducted several studies on low pay. It has produced a number of reports for the Low Pay Commission since 2012, focussing since 2014 on the pay of apprentices.
UWE’s Professor Don Webber led a BEA study in Bristol last year, with employers and employees being asked what impact a Living Wage might have. The study was carried out before the Government announced a National Living Wage was to be introduced.
Dr Ritchie said: “We were interviewing people about their attitudes to the Living Wage and it gave us some interesting insights. We were asking if people would work harder if they were on a Living Wage. Some said they would do but explained that if all organisations were paying the same Living Wage they wouldn’t feel their employer was exceptional. A number of employees were also worried about the effect on their job security because they recognised that some businesses have very tight profit margins.”