Success of National Living Wage depends on more businesses raising their game on productivity

Charles Cotton
The Uk Minimum Wage Of GBP5.05
If NLW is to be sustainable, businesses need to boost their productivity (Source: Getty)

Last Friday's introduction of the National Living Wage (NLW) will increase the pay of millions of the UK's low-paid workers. Ultimately, though, it will only be judged a success if employers can sustain higher wages for the low-paid without the need for job losses and cuts to other pay and benefits.

While the NLW will impact on a smaller proportion of London businesses compared to the rest of the country, those operating in the retail and hospitality sectors will notice an impact. However, as government plans to increase the NLW above the inflation rate every year from now until 2020, even firms that aren’t effected this year, may be within the next few years. If we take into account automatic pension enrolment and the proposed Apprenticeship Levy for larger employers, many could see their payroll costs increase significantly.

The key to sustainable increases in wage for the lowest-paid without damaging their job prospects is through raising productivity, and not the kind that comes from firing people and making the rest work harder.

There isn’t a 'how-to' guide for navigating through these payroll obstacles, but by improving productivity, organisations can keep the financial impact to a minimum and improve their business’s long-term performance.

Read more: The National Living Wage: A tax on hiring low-skilled workers

And increasing productivity works – among the 32 per cent of employers that increased salaries by more than two percent in 2015, 28 per cent were able to do so through productivity improvements, as our latest Labour Market Outlook found.

However, many find it hard to get their productivity plans off the drawing board. When we interviewed employers about the NLW last November, three in ten who said they’d be affected planned to raise productivity in response. But last month, just 12 per cent had actually taken steps to do so (eight per cent of small businesses).

With employers more likely to absorb the cost of the increase, rather than pass it on through higher prices, not doing anything could weaken businesses. Or it could mean that employees suffer through job losses, reduced hours, lower bonuses and little or no pay increase for those earning above the new minimum.

Read more: Seven in ten London firms back National Living Wage

Even if firms aren’t effected this year by the NLW, they may be within the next few years. So even if there’s a fix for 2016, it might not be enough for next year. To create a long-term solution, organisations need to commit to reviewing their working practices and job design and ensure employees have the best possible chance to be as productive as they can be in their roles.

The NLW is an opportunity for employers to examine how they can boost performance by designing jobs and work that provide challenges and opportunities for employees to use their initiative and develop new skills.

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