Since EEF’s last response to the LPC, economic conditions for manufacturers have become more challenging, linked to a slowdown in demand from the oil and gas sector and weaker demand from key export markets. Output growth is set to slow to 0.7% this year, and recent employment growth in the sector is set to stall. Pay growth has continued, albeit, at a slightly slower rate. We expect pay settlements in manufacturing to average 2.0% in 2015.
In the last 12 months, some manufacturers have found the most recent increases to National Minimum Wage rates more difficult to absorb due to additional business costs including new holiday pay calculations and auto-enrolment.
Looking ahead, the way in which the NLW was announced has caused some confusion for manufacturers. The new National Living Wage (NLW) and the National Minimum Wage (NMW) should now be seen as one and the same. Compliance for the NLW should be the same as that for the NMW and the timings of both the setting of the rate and implementation dates should be aligned.
Despite the confusion relating to the NLW, the new wage floor should not be unaffordable for manufacturers in general and nor is it unwelcome. The majority of manufacturers already pay above the level of the NLW, and should therefore be able to accommodate it.
However, this is not to say that there will be no action needed in response to a rising wage floor. Some manufacturers will look to reduce labour costs through productivity gains, reducing or restructuring their workforces, or moving elements of their production overseas. Others have expressed concerns about the costs associated with maintaining pay differentials for higher paid employees. Finally, there are some sectors – particularly the more commoditised ones – where paying the minimum wage is more prevalent and will therefore be worse affected.
The structure of the apprentice rate remains complex and some employers may fall foul of the legislation as a result. The new apprenticeship levy will both remove the age cap on apprentices and public funding for large employers. Therefore the apprentice rate structure should be reviewed.
1. There should be one system for setting the National Minimum Wage and National Living Wage:
The timing of NLW and NMW should be the same to minimise confusion and maximise clarity.
Rules around compliance should be the same for the NLW and the NMW.
The Low Pay Commission should be responsible for recommending both the NMW and NLW.
The Low Pay Commission should be responsible for setting out how to raise the NLW to 60% of median earnings by 2020.
2. Key principles for setting both the NMW and NLW should be predictability and affordability:
A more graduated approach towards 60% of average earnings is required going forward.
Flexibility is needed in case of a renewed economic downturn and in the longer-term a relationship between NLW and average earnings should achieve this.
Employers must be shielded from a combination of larger increases in the NLW coupled with faster-than-average-earnings increases in the NMW.
3. The Apprentice Rate should be abolished:
The apprentice rate structure remains complicated and should be abolished.
Apprentices should instead be paid their age-specific rates.
Read our full response below.