National Living Wage: maintaining pay differentials gives manufacturers a bit of the jitters

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At the Summer Budget, the Chancellor gave us a few surprises. The apprenticeship levy was one (which we blog on tomorrow) and the new National Living Wage was another – which we blog on today.

Now the first thing to say is that the new National Living Wage (NLW) is not the same as the ‘Living Wage’ set by the Living Wage Foundation. It’s easier to think of the NLW as an additional wage bracket to the National Minimum Wage (NMW). This is because the NLW will apply to those aged 25 and over. It will be in force from April 2016 at a starting rate of £7.20.

Still with me?

If your answer was ‘errrr’ then check out the diagram below, which I’ve pulled from the Low Pay Commission’s call for evidence and then added in the pay rates that will apply.

 

So what’s the impact for manufacturers? We surveyed our members and this is what we found:

  • 52% of manufacturers are already paying above the new National Living Wage to all employees aged 25 and over

  • Despite this 45% are concerned that the new National Living Wage will increase wage pressure within their business, while 37% say it will add to future wage rate uncertainty

  • To offset resulting higher labour costs 37% of manufacturers plan to focus on productivity improvements – however two in ten (19%) say they will need to reduce or restructure their workforce

A bit more detail on these headlines......

So over half of manufacturers already pay at or above the new National Living Wage to all employees aged 25 and over. For the most part then manufacturers shouldn’t be too directly impacted by the proposals. Some companies that have a larger proportion of employees below this rate will be those that need to consider taking action, which we come on to next.

Chart 1: Manufacturers are for the most part paying above the new NLW, %companies reporting proportion of employees at or above £7.20

NLW

Source: EEF Business Trends Survey 2015

 

Maintaining pay differentials is what’s giving companies the jitters

Despite companies already paying at or above the new rate, there is some nervousness about the impact the new NLW will have on wage pressures within their business, indeed almost half (45%) agreed they are concerned about the knock on impact.

Chart 2: The knock-on impact of the NLW is what is giving some manufacturers the jitter, %companies reporting they are concerned about the knock-on impacts

nlwknockon

Source: EEF Business Trends Survey 2015

This was a common theme when we spoke directly to manufacturers. The new NLW rate is an 11% rise on the current NMW rate. Will this mean then that employees on subsequent pay bands demand an 11% increase too? In manufacturing, there are multiple pay grades and pay differentials often reflecting the skill level and experience of the employee. It is this that companies are concerned about.

A surprise, surprise, can cause uncertainty

Some people like surprises, some people don’t. The announcement of the National Living Wage has led 37% of manufacturers to say that the announcement adds greater uncertainty about future wage rates.

Chart 3: Manufacturers have concerns about how wage rates will be set in the future, %companies reporting that the introduction of the NLW adds greater uncertainty for the future

NLWfuture

Source: EEF Business Trends Survey 2015

Chart 4: Manufacturers are also concerned about plans to increase the NLW in the future, %companies reporting concerns about increasing the NLW to £9 per hour by 2020

NLW9

Source: EEF Business Trends Survey 2015

Action stations?

Given the numbers of manufacturers who already pay all their employees £7.20 and above, it’s unsurprising that 31% of companies will not take any action. However, 37% will look to focus on productivity improvements and 19% will look to reduce/restructure the workforce.

Chart 5: Focusing on productivity improvements will be top form of action, % companies reporting action they will take, or consider taking as a result of the new NLW

NLWaction

Source: EEF Business Trends Survey 2015

What should government do now to support manufacturers?

Government needs to tread carefully. Yes, for the most part manufacturers will be able to absorb the additional rises. However, some companies have struggled with the recent rises to the NMW because these have been accompanied by changes to holiday pay calculations, auto-enrolment and going forward changes to pensions tax relief and the apprenticeship levy.

The timing of when the National Living Wage was announced and when it will apply from caused a great deal of confusion among manufacturers. Queries about compliance came in thick and fast and continue to do so. Therefore, the Government should align the National Living Wage timing and compliance with the National Minimum Wage.

Given the concerns around uncertainty for the future, Government, and indeed the Low Pay Commission should pursue a more graduated approach towards 60% of average earnings going forward and allow for sufficient flexibility in case of a renewed economic downturn.

Finally, the Low Pay Commission should be responsible for recommending both the NMW and NLW going forward, including how to raise the NLW to 60% of earnings by 2020. The LPC is trusted and respected organisation and the Government should leave it to do its job.

Author

Head of Education & Skills Policy

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