Resolution Foundation report finds that post-referendum inflation may prevent NLW reaching its target of over £9 per hour by 2020
Brexit could hamper the national living wage’s projected growth, a new report from the Resolution Foundation was warned.
The NLW, which took effect on 1 April 2015, is paid to workers aged 25 and above. It was initially set at £7.20 per hour, with a target of it reaching more than £9 an hour – 60 per cent of a typical (over-25) worker's hourly wage – in 2020.
With a number of projections suggesting inflation will rise significantly in coming months and years following the “huge uncertainty” around Brexit, it’s likely the real value of the NLW would be lower in the future than expected pre-referendum, the report said.
While £9 per hour is cited as the target for the NLW to reach by 2020, drawing on figures from Economists for Brexit, the Resolution Foundation said the NLW could be approximately 10p lower in real terms than previously expected.
Further research by the National Institute for Economic and Social Research (NIESR) highlighted in the report predicts three scenarios, with its optimistic version of events (the UK having an Economic European Area scenario similar to Norway) predicting a NLW equal to £8.22 in real-terms in 2020. In its pessimistic scenario, where the UK has no free trade agreement with the EU, it could mean a NLW worth £7.91 in real terms by 2020.
The report notes that raising the NLW to 60 per cent of the 25+ median worker's wage by 2020 while real wages are falling would be "challenging" and difficult for firms in low-paying sectors to implement.
“Brexit is likely to reshape the landscape in which many low-paying sectors operate. This means that the expertise of the independent Low Pay Commission is more important than ever, and ministers should carefully heed their advice,” said Conor D’Arcy, policy analyst at the Resolution Foundation.
In the more immediate term, the Office for Budget Responsibility had warned that the NLW’s implementation would lead to 60,000 jobs losses, but the Resolution Foundation’s report, The first 100 days: Early evidence on the impact of the National Living Wage, suggests this has not been a reality.
Only 35 per cent of organisations reported that the NLW had increased their wage bill, the report found. The majority (21 per cent) said it had been increased to a small extent, 8 per cent to some extent, and 6 per cent to a large extent.
Of those who said the NLW had impacted their wage bill, 36 per cent said they had passed the cost to customers through raised prices. The second most common response, cited by 29 per cent, was to take lower profits or absorb the costs.
While 16 per cent of respondents said the NLW had not yet impacted their wage bill, although they expected it to do so in the future, 43 per cent said they did not expect the NLW to ever raise their wage bill.
“The national living wage has already delivered a welcome pay boost to millions of workers,” said D’Arcy. “The big question has been how employers would respond. The evidence so far is that firms have absorbed some of the impact on their wage bill, while passing on a share of those rising costs to consumers through higher prices.
“Encouragingly, evidence of workers seeing their hours cut or even losing their jobs has so far been relatively limited. The challenge now is for firms to continue to respond positively to the National Living Wage, particularly by raising productivity," he added.
The Resolution Foundation also found that, in the next five years, 35 per cent of businesses expected to have to increase prices, 26 per cent expected to ask employees to do more and 21 per cent expected to invest in more training in reaction to the NLW’s introduction. A further 16 per cent said they expected to hire more workers under the age of 25.