Business reaction to the chancellor’s announcement of a new National Living Wage has been mixed.
The Federation of Small Businesses said that only six per cent of its members expect the National Living Wage to have a positive impact on their business and it warns that firms could freeze recruitment and raise prices to mitigate the extra cost of higher wage bill. Greggs the baker has even warned that the cost of its pasties might have to rise to compensate.
The National Living Wage announcement will introduce a pay premium for workers over the age of 25 on top of the current national minimum wage. Minimum pay for over-25s will rise to £7.20 per hour in April next year and the chancellor has indicated that he expects the rate to continue to rise, reaching at least £9 per hour by 2020.
Businesses will need to take big decisions in the coming months. Will foregoing profit, shedding staff or raising prices be a sustainable answer to the question a rising pay floor poses for the structure of their organisations?
For small businesses, particularly in sectors like retail and hospitality where there is intense price competition and where traditionally the workforce has included large numbers of low paid employees in entry level, lower skilled roles, the faster-than-expected elevation of the wage floor is going to have a big impact.
Is it possible to move to a more highly skilled, better paid workforce in industries where this has hitherto not been the case?
UKCES and the Department for Work and Pensions are working with seven employer partnerships in the retail and hospitality sectors to test ways of increasing the productivity of lower paid staff.
Read more about how the National Living Wage will affect your business:
The Bank of England has calculated that productive output per hour in the UK is still 13 per cent below that projected by the pre economic crisis trend. Employer action to enhance the productive output of low paid employees will mean that higher wage rates can pay for themselves creating a virtuous cycle.
However, this requires a radical rethink of the way we approach low paid work; better designed jobs, more multi-skilling, collaboration between employers and clearer routes of progression.
Jamie Oliver’s Fifteen
As part of the trial, Jamie Oliver’s Fifteen Cornwall is leading a partnership of employers and a college to develop a new model of high performance working in the Cornish hospitality industry.
Part of this approach will be to redesign traditionally low skilled jobs enabling low paid employees to gain skills that enhance their productivity – for example, increasing waiters’ productivity by training them as sommeliers.
The principles of this approach will be spread throughout small employers across Cornwall, helping to professionalise the industry and enabling low paid staff to gain skills and boost hospitality pay across the county.
The National Coastal Tourism Academy is working with small hotels in Bournemouth to test the service-profit chain principle; namely that better engaged, better inducted, better trained and better managed entry level staff have more commitment to their role and will go on to be more loyal and more productive.
Higher productivity leads to a higher profits which in turn means staff can be paid more.
Change of this kind requires a catalyst; for many this will be the National Living Wage announcement. It requires employer leadership; that means buy-in from senior management. And it requires know how; that is what UKCES’s trial projects are going to produce.
For small businesses seeking to mitigate the cost of the National Living Wage, the answer needn’t be staff reductions or more costly baked goods.
The answer can be more productive staff but this comes with the challenge of having to think in new ways about job roles and about how the contribution of employees is measured.
It will require business to think more carefully about the opportunities for training, multi-skilling and progression that they offer to low paid staff. The National Living Wage is the catalyst but it is employer leadership that will determine the kind of labour market that results.
Ben Dixon is a senior manager at UKCES.
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