National Living Wage increase – will it work?

No-one is going to argue against the increases in the National Living Wage and National Minimum Wage being a socially responsible thing to do.  The lowest income households should be given as much assistance as is possible when there are soaring costs for even the basics of food and heating.  Back in June, PWC announced that they were going to be giving a 9% pay rise to all staff and at the time ministers criticised this move saying it could fuel inflation further and for longer. 

The increase in the National Living Wage was 9.7%, so remembering the article on PWC this peaked our interest.  With many employers having pay scales which start with the National Living Wage, a 9.7% increase means the same or similar increase across the board, so they will be forced into the very same move PWC were criticised for.  So, what was the theory behind this move?  As we say, morally this was absolutely the right thing to do, but why did the Government change its’ tune?  

We found that in September 2020 there was a study carried out by Frontier Economics for the Low Pay Commission titled “Estimating the Impact of Minimum Wages on Prices”.  This concluded that there was evidence of a relationship between increases to the minimum wage and prices, but it was relatively small with a 10% increase in the minimum wage meaning a rise in prices of between 0.2% and 1.1%.  Based on this may be the conclusion was that it was a price worth paying, but our concerns would be any increase to inflation, however small, should be avoided when the Bank of England is frantically raising interest rates to combat it. Also, will the effect be greater given we are already experiencing high rates of inflation?

Undoubtedly support needed to come to low income families, but offering more Government support via grants would mean a greater deficit.  The National Living Wage increase puts the cost on to the employers and is no doubt more palatable for the Government, but at what price?  Yes, there will be less profits taxed at the new higher corporation tax rates from April 2023, but collection of income tax, and both employee and employers National Insurance on these wage increases will outweigh that (remember the personal allowance and income tax bands were frozen).  

For those in employment on the National Living or National Minimum wage this increase will be a lifeline, but we will have to wait and see whether this has an effect on the levels of unemployment in an already challenging market……

Building these National Living Wage increases into your forecasts is essential so that you can estimate the impact to your business. For help with this, reach out to us by hitting the button below and we’ll be in touch.

Sources:

BBC News https://www.bbc.co.uk/news/business-61941595

“Estimating the impact of minimum wages on prices” https://assets.publishing.service.gov.uk/government/uploads/system/uploads/attachment_data/file/942445/Frontier_Economics_-_Estimating_the_impact_of_minimum_wages_on_prices_-_FINAL.PDF