Over half of all employers (54%) say the new National Living Wage (NLW) will have an effect on their wage bill, with three in ten of those organisations that will be affected by the new higher wage floor planning to raise productivity in response. This is according to a new survey published today by the CIPD, the professional body for HR and people development, and the Resolution Foundation (RF).

The survey of 1,037 employers, which launches a joint CIPD/RF investigation into how firms in low-paying sectors will adapt to the National Living Wage, shows that the higher wage floor will have its greatest impact in retail (79%) and hospitality (77%), where over three-quarters of employers say their wage bill will be affected. In addition, more than two-thirds of employers in the healthcare sector (68%) will be affected.

Overall, almost one in five employers (18%) say they will be affected to a large extent by the NLW, a figure that rises to around a third in retail (33%) and hospitality (32%).

Asked for the three most important things they plan to do in response to the NLW, employers are most likely to say they intend to manage these higher costs by improving efficiency / productivity, with almost a third (30%) of employers intending to do this.

Taking lower profits / absorbing costs is the next most popular response (22%), followed by reducing overtime and bonuses (16%), raising prices (15%) and reducing the number of employees through redundancies or slower recruitment (15%).

Fewer than one in ten employers say they will reduce the basic pay growth rate for the rest of the workforce (9%), reduce hours (9%), hire more workers under 25 (8%), hire more apprentices (8%) or cancel/scale down plans for investing in or expanding the business (7%).

The CIPD and the RF note that the responses differ by type of employer. For example, small employers (1-249 staff) are significantly more likely to say that they will respond by raising prices (25%) than larger employers (250+ staff) of whom just 10% say they will respond in this way.

A higher proportion of public sector employers (21%) say they plan to cut the size of their workforce as a result of the introduction of the National Living Wage than private sector employers (13%).

The CIPD and RF welcome the fact that so many employers plan to raise productivity in response to the new higher wage floor. However, they warn that securing these gains may be challenging for many firms.

The survey also finds that of those firms who say they’ll be affected by the National Living Wage, 26% say that it will reduce pay differentials between those affected and their supervisors/managers.

However, with almost as many employers (20%) saying that they would maintain pay differentials, the NLW also looks set to have a positive ‘ripple effect’ for workers already earning above the new wage floor.

This finding supports recent RF research, which estimated that 2.8 million workers would directly get a pay rise as a result of the new National Living Wage by 2020, with a further 3.2 million workers receiving an indirect benefit as employers seek to maintain pay differentials between staff.

However, 46% of employers who expect to be affected by the National Living Wage do not yet know what impact it will have on pay differentials within their business, so there is still considerable uncertainty over what the effects will be.

Just over a quarter of employers (28%) think that cuts to corporation tax and national insurance will offset at least some of the extra wage costs, though only one in ten say the tax cuts will offset most or all of the increased costs. However, reflecting the fact that many employers have yet to fully assess the impact of the range of taxation changes, almost a third of employers (30%) were unable to give a response.

Mark Beatson, Chief Economist at the CIPD, said:

 “The National Living Wage was a bombshell for most employers when it was announced in July. It comes into force next April, which does not give employers a lot of time to prepare. Hence we found 26% of employers in September saying it was still too soon to say how they would manage the cost implications.

“For those that have started to think about the consequences, the emphasis on efficiency rather than cost-cutting is welcome. However, our research also suggests that only a small proportion of firms see any substantial connection between the National Living Wage and other changes to taxes and National Insurance Contributions. If the Chancellor wants to provide any more support for businesses grappling with the National Living Wage in the Autumn Statement, it might be better delivered through enhanced business support or special help for the care sector rather than shaving small amounts off general business taxation.”

Conor D’Arcy, Policy Analyst at the Resolution Foundation, said: 

“The new National Living Wage will have a huge impact on the labour market when it comes into effect next April, with millions of workers set to get a pay rise and half of all employers saying they’ll be affected.

“It’s encouraging that so many firms say that they’ll respond to the new higher wage floor by improving efficiency. But actually delivering this will prove challenging in many sectors, and it’s important that firms are given the necessary support to boost productivity.”

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