Rising living wage set to drive up employer costs

Businesses that employ staff on low pay will have to absorb increasing costs next spring, following changes to the national living wage.

The national living wage hourly rate for workers over the age of 25 is set to rise by 6.2% from 1 April 2020 - from £8.21 an hour to £8.72.

Employers will also have to dig a little deeper to fund low-paid workers under the age of 25 due to the domino effects of the main increase.

Workers aged between 21 and 24 will receive a 6.5% pay rise to £8.20 an hour, while employers will have to pay apprentices at least £4.15 an hour.

Staff aged 18 to 20 should see their hourly rate increase from £6.15 to £6.45, and under-18s will be paid at least £4.55 an hour - up from £4.35.

The recommendations were announced on New Year's Eve by the Low Pay Commission and look set to be adopted in the Budget on 11 March 2020.

The new Government claims the changes will put an extra £930 a year in the pockets of national living wage staff who work 35 hours a week.

It also remains in line with a government pledge prior to the recent election, which promised to raise the national living wage to £10.50 an hour by 2024.

But businesses warned that a sharp minimum pay rise would put pressure on companies and urged the government to reduce costs from elsewhere.

Paying for the increase

Business groups understandably treated the announcement with caution, with some questioning how under-pressure employers will pay for it.

Craig Beaumont, director of external affairs at the Federation of Small Businesses (FSB), said:

"This government has promised a reduction in the jobs tax through an increase in the employment allowance.

"With a national living wage increase of this size now on the horizon, it's critical that it delivers this swiftly."

The FSB should get their wish granted in a post-Brexit Budget in March, following a Conservative Party manifesto pledge.

It promised to deliver a tax cut for more than half-a-million small firms by raising the employment allowance - but does this go far enough?

Cashflow concerns

The British Chambers of Commerce (BCC) expressed concerns that the rising costs smaller employers face may pose fresh cashflow problems.

The planned increase to the national living wage is four times the current rate of inflation, which remains at 1.5%, and looks set to arrive on the back of the UK finally leaving the EU after almost four years of uncertainty.

Hannah Essex, co-executive director at the BCC, said:

"Businesses support the drive to improve living standards, but many have struggled with increased costs in a time of great economic uncertainty.

"Raising wage floors by more than double the rate of inflation will pile further pressure on cashflow and eat into training and investment budgets.

"For this policy to be sustainable, government must offset these costs by reducing others - and impose a moratorium on any further upfront costs for business."

Knee-jerk reactions

Some firms that have to absorb these costs in 2020/21 may be considering downscaling recruitment plans, reducing working hours or cutting jobs.

But an independent report published last year claimed there is little evidence to justify these measures.

Instead, professor Arindrajit Dube, an expert on the subject, said there was "room for exploring a more ambitious national living wage" in the UK.

He said this could be "in the range of 60% to two-thirds of median hourly earnings".

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