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The Low Pay Commission (LPC), which advises the Government on the level of the National Living Wage (NLW) and the National Minimum Wage (NMW), will today (Wednesday 9 December) release its full report outlining the rationale for its latest recommended increase to the statutory floor for wages.

The recommendation, which was accepted by the Chancellor a fortnight ago and will see the NLW increase by 2.2% or 19p to £8.91 (for staff aged 25 and over) next April, was informed by commissioned quantitative and qualitative research, to which Incomes Data Research (IDR) contributed.

IDR’s report, ‘Impact of future targets for the National Living Wage,’ draws on case studies of 22 organisations, predominantly in low-paying sectors, looking at how they have managed successive increases in the NLW; how their decisions on pay, conditions and employment have been affected by the pandemic; and how they anticipate accommodating forthcoming changes to the NLW age bands.

Increase falls short of target but addresses needs of employers in low-paying sectors

The latest increase is by far the lowest uplift in the NLW since its introduction in April 2016 – previous increases ranged between 4.1% and 7.5% – and is in line with the latest rise in the recommended voluntary ‘Living Wage’ (also 2.2%, to be implemented by accredited employers by May 2021).

It is also slightly lower than the 2.5% median award that was observed as part of IDR’s ongoing monitoring of pay settlements across the economy at the time when Commissioners were deliberating on this year’s NLW uplift. (This has since fallen to 2.0%, as at November.)

The LPC had previously envisaged a target figure in the region of £9.21 (representing a 5.6% increase) for 2021, in the second step towards the Government’s original objective – set in the context of a more stable economic climate – for the NLW to reach two-thirds of median earnings by 2024. (This was most recently estimated at £10.69, subject to sustained economic growth.)

That the latest increase falls considerably short of this target is indicative of the impact the pandemic has had on the economy, especially in many of the low-paying sectors such as hospitality and non-food retail, where most businesses have been shuttered or operating on a much-reduced basis during this year’s lockdowns.

‘Our research suggests that many employers in these hard-hit sectors, especially smaller employers, will welcome this more modest uplift to the statutory minimum in the current challenging trading environment,’ says Katherine Heffernan, Senior Researcher at Incomes Data Research.

‘Several organisations also told us that an earlier announcement of new NLW rates and a clearer view of the latest estimates would make it much easier for them to plan ahead.’

Lowering of the age threshold in keeping with employers’ pay strategies

The April 2021 increase will also see the lowering of the age threshold for the NLW from 25 to 23, as planned.

While this move could potentially entail higher costs for employers in some sectors, such as hospitality, IDR found that few case study organisations were concerned or likely to be impacted by it.

‘Only four of the organisations we spoke to vary pay according to age within the core workforce,’ reports Heffernan.

‘Some feel it would be an unnecessary complication in their pay structure, while others are opposed to age-related pay on fairness grounds. And one hospitality employer we spoke to anticipates that Brexit will make recruitment more challenging, such that it might have to broaden the talent pool by targeting more older workers.’

The Government’s intention is that the age threshold will ultimately reduce further, to 21, by 2024.

Youth rates will also increase in April 2021 but by a lower amount than the NLW, with the exception of the apprentice rate, which will rise by 3.6%.

Successive NLW increases have had significant implications for pay differentials

Another key finding from the research was that successive above-inflation increases in the NLW have had a significant impact on pay differentials at many organisations, with the lowest rates increasingly encroaching upon, or even overlapping with, hourly rates higher up the pay framework.

‘Many employers in low-paying sectors have exhausted their options for offsetting further increases to the statutory minimum by reducing enhancements such as overtime or unsocial hours pay,’ explains Heffernan.

‘Instead, we are seeing that efforts to manage the paybill now often take more indirect forms, such as changes to pay structures.’

The research also found evidence of greater use of technology and multiskilling in low-paid roles.

‘In some cases, this suggests that employers are going to expect more – in terms of level of skills or flexibility – from their staff on the lowest rates,’ says Heffernan.

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