The introduction of the National Living Wage (NLW) could have a number of impacts in Northern Ireland (NI), raising the earnings of those aged over 25, but potentially creating issues for Small to Medium Enterprises (SMEs).
In April 2016 the United Kingdom (UK) Government introduced the NLW for workers aged 25 and over. The NLW is £7.20 per hour, acting as a premium to the National Minimum Wage (NMW) (which is £6.70 for those over the age of 21).
The Low Pay Commission (which sets the NMW) will make recommendations to the UK Government as to how the NLW will change on a year to year basis. The UK Government intends for the NLW to reach 60% of median earnings by 2020 (the £7.20 rate is 55% of median earnings), with the overall objective of the NLW reaching over £9 per hour by 2020.
Potential Impact of the NLW
The introduction of the NLW has raised questions regarding its potential positive and negative impacts across the UK.
The Office for Budget Responsibility (OBR) forecasts that there will be marginally higher whole economy earnings growth as a result of the NLW’s introduction. Hourly productivity could also increase by 0.3%.
Alongside this, the Resolution Foundation estimates an income rise for 1.9 million people. In addition, by 2020, 29% of female employees could also benefit from the NLW.
The Nevin Economic Research Institute (NERI) anticipates that the NLW’s introduction will result in a wage increase for 13% of workers and knock-on salary increases for other workers in NI.
However, some downsides also have been identified. The OBR states that by 2020, the NLW’s introduction could lead to between 60,000 to 120,000 job losses across the UK, with lower average hours and reduced Gross Domestic Product by 0.1%. In addition, there could be lower overall profits for companies, which may lead to an increased borrowing. For NI, it finds that there could be a corresponding reduction of between 1,500 and 3,000 jobs.
The Resolution Foundation carried out an analysis on the ‘bite’ each UK region would feel as a result of the NLW’s introduction. It found that NI:
…has the highest bite of any part of the UK, at 63 per cent. This suggests that it is likely to face the most pressures in implementing the NLW.
Indeed, the NI Independent Retail Trade Association stated that the potential wage increase could be a significant challenge to NI SMEs, especially as a result of the high proportion of microbusinesses (i.e. those that employ between one and nine workers).
Concerns also have arisen within the social care sector. A report by the NI Commissioner for Older People explains that the average hourly tariff paid for home care in NI costs £11.35. The tariff reflects both workers’ wages and all other costs, and is the lowest in the UK. However, an increase in workers’ wages, without a corresponding increase in the tariff, could adversely impact on the sector’s ability to deliver care.
The introduction of the NLW will have a number of impacts in NI and raises questions as to how businesses will react to the changes it inevitably brings.
The NERI states that:
How businesses will react to this increase in the wage bill is unclear at this stage. Recent history suggests that business will either reduce costs elsewhere or take a dip in profits.
Whilst it can be expected that the anticipated additional employer costs, due to the NLW, will be offset in some way by the potential positive impact of increased spend due to higher wages on the economy, time will tell what the extent and degree of this impact will be.