EEF has submitted its response to the Low Pay Commission (LPC), the independent body that makes recommendations to government on what the rates for the National Minimum Wage and now the National Living Wage should be for the year ahead (April 2017).
A quick bit of background:
Just to remind readers that the National Living Wage was only introduced this year. It’s essentially an additional National Minimum Wage rate for those aged 25 and over. The big difference between the National Minimum Wage and the National Living Wage however is that the target for the latter is to get it to 60% of median earnings by 2020.
At the time of the announcement, the then Chancellor estimated this to be £9 per hour but it’s important to remember that the target is not £9 per hour but 60% of median earnings? Got it? You need to, as it’s pretty important…
Today’s blog takes a look at EEF’s key recommendations and the reason behind these,
Recommendation 1: The LPC should revise earnings growth forecasts before pursuing a straight line approach to the National Living Wage (NLW)
When the LPC set out its plans to get the NLW to 60% of median earnings it proposed a straight line approach. Now one of the things manufacturers look for is certainty and stability so actually such an approach can offer employers a degree of certainty about future rises.
However, the LPC’s current earnings forecast needs to be revised before this approach is adopted. The call for evidence was published before the referendum and under their estimations the NLW would need to hit £7.60 per hour in April 2017 based on their trajectory.
What hadn’t been considered is the economic uncertainty following the EU referendum result, which means the conditions are no longer in place for a more rapid pace of increase, as that stated in their LPC’s call for evidence.
There are a number of risks around the current forecasts for median earnings growth, particularly in the next 2 years. If growth should be weaker, the proposed increase (£7.60) would actually be in excess of what would be required to meet the target.
Let’s take a look at a chart to explain this better….
In our first scenario we assume that median earnings growth slows sharply alongside weaker economic growth in 2016 and 2017, then picking up. This would leave the LPC with a target of closer to £8.20 for the NLW in 2020. Our second scenario assumes median earnings growth remains subdued – close to average annual growth rates recorded between 1998 and 2015 – again the 2020 would be lower at around £8.50.
If the LPC continued their current straight line trajectory to £9.05 and recommended a rate of £7.60 next year they could potentially front-load increases at a time when economic uncertainty remains elevated and some employers hit with the apprenticeship levy and small companies auto-enrolment.
The second part of our recommendation then is to only have modest increases to the National living Wage in April 2017.
Recommendation 2: The other National Minimum Wage rates should be maintained at least in the short-term
Now if you managed to get your head around recommendation 1, then 2 and 3 should be pretty easy.
Manufacturers do not tend to use the other national minimum wage rates. In case you didn’t know there is a rate for 16-17 year olds, a Youth Development Rate (18-20) and an Adult Rate (21-24).
But our members generally pay based on job role, skill level, experience of employee and so on. The new National Living Wage has effectively become the pay base line.
That said, in the here and now, we are unsure of manufacturers’ plans to use age-related rates at least in the short-term, given the level of uncertainty and low confidence within the industry currently.
So in the short-term, maintaining this flexibility is probably requirement. But we do think there should be a commitment to review the structure again with a view to strip out some of the bands.
Recommendation 3: An increase in the apprentice rate could drive quality
As we blogged on a couple of weeks ago, manufacturers pay well over the apprentice rate and have supported recent increases in a nod to the value our industry places on apprentices. Members have raised concerns that the forthcoming levy could impact quality and that an increase to apprentice pay could be a useful lever to both retain quality and increase demand.
As a sector, we may stand alone on this. But it’s important for us to voice the views of the industry to say that for us, a more significant increase to apprentice pay then we saw last year for example would do more good than harm.
You can read our full submission below.
Did you know that EEF conducts it's own pay settlement and pay benchmarking data for the manufacturing industry? You can get involved and check it out here.