National living wage might cost sector £500m by 2020, study claims

A briefing paper by Stephen McKay, an associate of the Third Sector Research Centre, says the cost of the Budget measure will be larger than the Chancellor anticipated

Pay: national living wage could hit the sector hard
Pay: national living wage could hit the sector hard

The government’s decision to introduce a national living wage could cost the charity sector an additional £500m by 2020, according to a study published by the Third Sector Research Centre today.

During the summer Budget earlier this month, the Chancellor of the Exchequer, George Osborne, announced that the national minimum wage, which is currently £6.50 an hour for those aged 21 and over, would be replaced by a national living wage from April 2016.

He said this would be set at £7.20 an hour for those aged over 25 from next year, before rising to at least £9 an hour by 2020.

Stephen McKay, professor of social research at the University of Lincoln and a TSRC research associate, says in the briefing paper Accounting for the Impact of the Forthcoming National Living Wage on the Third Sector that the cost of increasing pay to a minimum of £7.20 an hour would cost the sector about £100m, and a further rise to £9 an hour would lead to an additional earnings bill of £400m. The sector would face a total bill of £500m by 2020, he says.

McKay says that increasing the pay rate to £9 an hour would affect the earnings of about 250,000 people – almost three in every 10 of the third sector workforce. But that the figure could be higher because employers might have to raise the pay of workers earning just above the new wage level, he says.

McKay says an analysis by the Office for Budget Responsibility suggested that the introduction of the national living wage would increase the wage bill of the country by only 0.3 per cent. But McKay argues that this underestimates the costs because it does not include employers’ national insurance and workplace pension contributions. He says that an additional 13.8 per cent of earnings is likely to be paid in employer NI for increases in earnings alone.

He notes that the change will have the biggest effect on third sector organisations that employ lots of staff aged over 25 because the national living wage will not apply to younger people.

McKay told Third Sector: "The costs are a lot larger than the Chancellor’s speech implied. An extra half a billion pounds is not a trivial amount of money."

He said the move might particularly affect charities in the social care sector that are directly funded by local authorities. "Care workers’ wages are often paid by local authorities, which won’t have any more money to spend, so we could see less care provided," he said.

McKay said third sector organisations might react to the changes by employing more young people. "The third sector tends to employ older workers, so we could see more apprentices and trainees," he said.

Nick Davies, public services manager at the National Council for Voluntary Organisations, told Third Sector: "The big question for us is how local authorities and other public sector funders react to the wage increase. Do they increase the funding or do they expect providers to find the additional money through savings in other elements of their delivery?"

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