National Living Wage cut profits rather than jobs

Instead of cutting jobs, employers responded to the National Living Wage(NLW) by raising prices or reducing profits, according to a new report by the Resolution Foundation.

The report considers both the initial impact of the NLW and its longer term prospects in the wake of the UK’s decision to leave the European Union.

The survey of 500 businesses, carried out by Ipsos MORI in the weeks running up to the referendum, finds that around a third (35 percent) of businesses say the NLW has increased their wage bill this year, though only six percent said it had to a large extent.

A further 16 percent of firms expect the NLW to increase their wage bill at some point in the future.

Of those firms affected by the NLW, the most popular short-term action taken has been to increase prices (36 percent), followed by taking lower profits (29 percent).

The Foundation notes that while this ‘suck it and see’ approach is understandable in the short-term, many firms will need to adjust their action in the medium-to-long term.

The survey finds little evidence of more negative responses to the NLW from employers.

The Brexit outcome is likely to have a major impact on the labour market in the coming months and years.

The report says that the decision to leave the EU has significantly increased uncertainty about the outlook for earnings in the coming years.

This will have major knock on effects for the NLW because it is set as a proportion of typical worker earnings.

Although there is huge uncertainty regarding the short-to-medium term effect on real wage growth, with some projections more encouraging than others, the real-terms value of the NLW in 2020 could be up to 40p lower than had been expected before the Brexit vote.

Conor D’Arcy, policy analyst at the Resolution Foundation, said: “The National Living Wage has already delivered a welcome pay boost to millions of workers. The big question has been how employers would respond. The evidence so far is that firms have absorbed some of the impact on their wage bill, while passing on a share of those rising costs to consumers through higher prices.

“Encouragingly, evidence of workers seeing their hours cut or even losing their jobs has so far been relatively limited. The challenge now is for firms to continue to respond positively to the National Living Wage, particularly by raising productivity.

“Brexit is likely to reshape the landscape in which many low-paying sectors operate. This means that the expertise of the independent Low Pay Commission is more important than ever, and ministers should carefully heed their advice.”