What does the introduction of a £9.00 per hour minimum wage by 2020 mean for you?

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The glib answer is that if you are being paid the current minimum wage of £6.50 per hour this represents more than a 38% pay increase and that if you are under 25 it will not apply to you anyway. But this answer fails to address the impact of such an increase on employees and employers. Also it does not really address the question for those paid, for example, £8.50 per hour who are currently supervising a team of people of minimum wage earners? Should their pay also increase by 38% to retain the pay differential between them and the people they supervise because certainly the difference in their responsibilities will remain the same? These are all questions which not only employees will be interested in answering but also their employers.

It is estimated that somewhere in the region of 20% of the UK population are paid below a living wage which is currently approximately £1 more than the minimum wage (more if you live in London). Raising the minimum wage to where the government is intending aims to address this so that more if not all people in employment will receive a living wage – which for those of us of good morals see as a good thing. However, speaking to a client of mine, also a man of good morals, who runs a medium sized logistics business (approximately 600 people), where the majority of staff are working in lower paid roles, the annual increase to his wage bill will be above £400k. This is purely to bring everyone up to the new minimum wage level in 2016. It does not address further increases to £9.00 by 2020 and neither does it retain the differential between staff who are currently paid slightly more than the minimum and may therefore have an expectation to receive more than the minimum. The question for him, morals aside, is where will this additional money come from?

To fund these increases in the wage bill employers will either have to take a hit on profits or increase productivity. The first option is likely to be unpalatable for the shareholder the other is never easy because it involves change of some sort. Some of the change may be positive for example introducing new ways of working which may necessitate investment in training; thereby equipping staff with new skills. The change could also be negative and employers may be forced to make some existing staff redundant and those who remain behind work harder. This might be particularly so in the public sector where people working in lower paid roles simply become unaffordable because there is not enough of an already squeezed budget to fund 38% pay increases.

Like Sir Isaac Newton stated ‘for every action there is an equal and opposite reaction’. Quite what the reaction to an increase in pay by 38% for the lowest paid will be, is very hard to predict. When the National Minimum Wage was introduced in April 1999 requiring employers to pay £3.60 per hour the doom-mongers were talking about mass unemployment and workers becoming unaffordable. Despite this employment has steadily risen and the rate of unemployment even during the recession of the late noughties failed to increase, such that this year never have more people in the UK (31 million) been in employment. We could of course argue that salaries have failed to keep pace with inflation during that time and therefore more people in real terms are doing more for less; meaning that they are actually more affordable than they were pre-recession. I suspect that inflation will start to rise again next year when the effects of the drop in the price of oil have worked through.

It could be argued that part of this increase in the minimum wage is a reaction correcting the fact that wages have not kept pace with inflation over the last few years and that some of the increase will be covered by further inflation between 2016 and 2020. Also the establishment of a ‘living minimum’ wage may encourage more people currently funded through welfare payments to take lower paid roles, potentially reducing the strain on the public purse, through a reduction in need for welfare payments and increased tax revenues. This could certainly solve the problem of how to fund pay increases for lower paid public sector workers. However, this is all conjecture and will be dependent on the equal and opposite reaction of economic factors well beyond these shores. What we can be sure of is that the Government have made a commitment to raise the legal minimum wage level between now and 2020. Employees and employers will likely have to adapt to some significant change and in order to stay ahead of the competition it might be that speaking to a good recruitment agency about what is going on the market might be a practical move.

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