NATIONAL LIVING WAGE: IMPACT ON THE ECONOMY
The National Living Wage (NLW) is referred to as the mandatory minimum wage which is being paid to labors in the United Kingdom who are above 25 years of old, and was implemented from 1 April 2016. The new National Living Wage that was set is relatively at a higher rate at £7.20 per hour as compared to the previous national minimum wage rate and is also estimated to increase to a minimum of £9 per hour by 2020. (Gov.uk, 2017) The national living wage is set between April 2016 and April 2020, with the intent of achieving 60% of the average UK income by 2020.
The national living wage implies that there are several years of extensive rise in the minimum wage. To counter the same, lower-level workers’ National Insurance discounts are increased to balance the huge costs of the National Living Wage. In September 2015, the anticipated fine for employer default was declared. The fine is set as twice the previously payable defaulted amount as per the National Minimum Wage Act 1998, which has been increased from the previous 100 percent debt owed to 200 percent now. The fine if paid within 14 days is reduced to 50 percent. The highest fine paid is static at £20,000 per worker. An extra fine of being disqualified from the post of company director for a period of 15 years will also be applied by the courts. (Allen, 2017) The implementation budget is set to be doubled, and the making of a committed HM Revenue and Customs non-compliance team to follow criminal trials was declared.
The exact impact of the new increased living wage on the economy cannot be predicted accurately by scholars. However, there has been evidence of benefits arising from the levying of an increased minimum wage upon the overall wage structure. Minimum wages have successfully raised the wages of low-wage workers in developed as well as developing countries. In Latin America, a 10% rise in minimum wages caused the average wages to increase by 1% to 6%, as a result of which the low-wage earners benefitted immensely. (Metcalf, 2004) Minimum wages have helped reduce inequality in the formal as well as informal sectors all across Latin America, Indonesia, Russia, China, India as well as Europe.
The major gainers would be the low-paid workers, as about 1.8 million workers are supposed to be paid at the £7.20 preliminary rate in April 2016. Nevertheless, some uncertainties with respect to the broader impact of the NLW do exist and there are some adverse impacts on employment and working hours. The Office for Budget Responsibility (OBR) did suggest the NLW could probably enhance unemployment levels in 2020 in the range of 20,000 to 120,000 people. (National Minimum Wage, 2016) Research papers by the Resolution Foundation in March 2016 have hinted that by introducing the measure one can expect an immediate rise in the incomes of those earning minimum wages by 10.8%. The number of workers expected to be impacted would be around 4.5 million which translates to anything between 3% and 30% of the workforce in a specified area subject to the location. The total number of workers that would be impacted is expected to increase to 6 million by 2020 provided a £9-an-hour minimum wage is implemented by then.
The majority of the studies indicate that a higher minimum wage would lead to a decline in employment. (Stigler, 1846) Going by the estimates provided by the Office for Budget Responsibility, by 2020 there would be 60,000 lesser jobs as a consequence of the National Living Wage. (O'Neill, 2016) However, the expected gains in productivity haven’t been studied much. Several retailers would decrease labor by reducing staff hours as well as employee numbers majorly by not replacing staff once they leave. An outlet with ten staff on the new minimum wage in August 2015 was shelling out a total remuneration to the staff of £65.00 per hour (plus £8.97 employer's national insurance, a total of £73.97). Post April 2016 it was required to pay £72.50 per hour (plus £10.00 national insurance, a total of £82.50). By reducing one staff, its hourly wage bill would be approximately to what it had been previously, at £64.80 (plus £8.94 national insurance, a total of £73.74). (Bamfield, 2017) Retail isn’t an exact science and hence by reducing a few staff hours or employee numbers one could limit the rise in the wage bill without impacting service levels majorly.
Retailers would be compelled to pay the new rates applicable and as labor costs would rise, the retailers would try to pass the additional cost on to the customers in the form of higher prices. (Business Insider, 2017) However, it is quite unlikely that they would be successful in passing on all the costs, but it is estimated (as per calculations below) that the living wage in 2020-2021 is likely to increase the retailer’s costs by £3,260.48 mn. Considering the labor reduction and operational modifications they would bring in to reduce the costs, the new minimum living wage would, in all probability, impact the retail prices by about a 1.1% increase per year between 2016 and 2020. Along the same lines, one could expect the price of labor-extensive services such as courier delivery to shoot up and signal the end of 'free' home delivery for all barring high-value baskets (e.g., £65 minimum). The retailer’s cost of 'click and collect' would also rise and one could expect about one-third of the retailers to introduce a charge unless the order size is substantial, say £40. (Bamfield, 2017)
Raising the living wage could trigger an increase in economic growth without any major negative economic consequences. There is an increasing body of literature, especially from the Organization for Economic Cooperation and Development countries, which establishes the aggregate demand, productivity, and growth-inducing aspect of minimum wages. It has been proved that in underpaid sectors a vicious cycle of high-level employee turnover as well as non-attendance could lead to bottlenecks in operational efficiency and abysmally low standards of productivity which could severely impact the bottom line. (Metcalf, 2004) Organizations that pay the Living Wage, on the other hand, have seen substantial improvements in work quality, lesser absenteeism, and turn-over, creating a robust corporate image. Several Living Wage employers go the extra mile to maximize the benefits by improving job quality, providing training, and ensuring smoother operations to deliver long-term improvement in staff performance, productivity as well as motivation.
A national minimum wage, set at a higher level, could help attain the principal objective of minimizing working-class poverty levels as well as inequality in the UK. Since the poverty lines as well as minimum wages follow close patterns, enhanced minimum wages would reduce poverty in nearly all developing countries under study. For example, in countries like the Philippines and Thailand, an increase in minimum wages by 1% would reduce 0.5% of poverty. Similarly, in South Africa, the poverty level is estimated to reduce by 2% approximately. The fall is highest for black South Africans. (The Conversation, 2017)
Though the advocates are under the assumption that living wage laws reduces poverty, it may not be so in reality. One must consider that the wage gains that accrue for workers might not in reality belong to families having very low income. (Toikka, Yelowitz and Neveu, 2005) Thus the wage gains benefitted by some could be offset by the job losses as well as reduced working hours borne by others. Moreover, there is a concern regarding the overall net effect of living wage laws on household income after taking into consideration the reduced contribution of government social programs which could result from increased earnings. Thus, the overall impact of poverty is an empirical question. (Taylor, 2009) As per Neumark and Adams’s observations regarding the impact of living wage laws on household poverty, it is only the business-assistance living wage laws that have a statistically noteworthy effect on the reduction of poverty, wherein a 100% rise in the living wage causes a 12% fall in the poverty rate of families. As explained by Neumark and Wascher, living wages can help families that are close to the poverty line but not those that are substantially below it. (Lammam, 2014) Furthermore, they assert that living wages don’t seem to benefit the poorest families, which isn’t too surprising as such families hardly have any workers, or had a worker who was displaced by the rise in the living wage. To summarise, as per the research by Neumark and Adams, living wage laws have had a relatively marginal impact on poverty reduction and haven’t benefitted the most deprived families.
To conclude, a newly raised living wage has been enacted in the United Kingdom, which requires employers to pay a minimum wage of £7.20 per hour to workers above 25 years of age. The new living wage is said to impact the economy with some benefits as well as some disadvantages. The major gainer is the workers, who get to enjoy an elevated wage being paid to them. However, along with an increased wage rise for lower-level workers, there are also expectations of some job cuts, as employers seek to balance out the increased labour cost. it has been estimated that unemployment of the magnitude of 20,000 to 120,000 people could reach in 2020. The impacts of the newly increased living wage could be passed on to the customers in the form of increased prices of products as retailers balance out the increased labor cost. On the positive side, the increased living wage has been seen to increase efficiency in the workplace leading to enhanced productivity. However, its contribution to reducing poverty is questionable as most scholars believe that it doesn’t impact those workers who are below the poverty line. Though it has been seen to reduce poverty in some developing countries, but majorly the living wage laws show relatively marginal impact on poverty reduction and haven’t benefitted the most deprived families
References
Allen, K. (2017). The national living wage and what it means. [online] the Guardian. A national minimum wage would cut poverty and boost growth in South Africa. (2017). The Conversation. Bamfield, J. (2017). What Does the Government's Living Wage Mean for UK Retail? - Centre for Retail Research, Nottingham UK. Retail Research.org. Gov.uk. (2017). National Minimum Wage and National Living Wage rates - GOV.UK. [online] Lammam, C. (2014). The Economic Effects of Living Wage Laws. Fraser Institute.
Metcalf, D. (2004). The impact of the national minimum wage on the pay distribution, employment and training*. The Economic Journal, 114(494), pp.C84-C86.
National Minimum Wage. (2016). Low Pay Commission Report Autumn 2016. Department for Business, Energy and Industrial Strategy.
O'Neill, F. (2016). Economic impacts of the National Living Wage. House of Commons.
Stigler, G. (1846). The Economics of Minimum Wage Legislation. The American Economic Review, 36(3), pp.358-365.
Taylor, P. (2009). Why a "living wage" doesn't kill poverty (1st ed.). Winnipeg, Man.: Frontier Centre for Public Policy.
Toikka, R., Yelowitz, A., & Neveu, A. (2005). The “Poverty Trap” and Living Wage Laws. Economic Development Quarterly, 19(1), 62-79.
