Gill Taylor: The hidden costs of the National Living Wage

It will put extra pressures on organisations delivering local government services, our columnist says

Gill Taylor
Gill Taylor

From 1 April this year the government has introduced a new National Living Wage for the over-25s of £7.20 an hour (£6.70 for those aged between 21 and 25), which will benefit more than a million workers. It is mandatory and not to be confused with the voluntary Living Wage. This campaign has been around since 2001 and set the rates for the optional standard. The rate is currently £9.40 in London and £8.25 nationally. It is set by independent academics and reviewed every November.

The new NLW will rise each year, with the aim of reaching 60 per cent of the median wage by 2020, or £9 an hour. This strategy supports the government's vision of a higher-wage (and thus higher tax revenue), lower-benefits society. The Chancellor, George Osborne, is banking on workers increasing productivity as a result of the higher wage rates. This looks like a massive gamble because the latest figures, released in February, show that UK productivity is 18 per cent behind the average in the rest of the G7 - the widest gap since records began in 1991. Osborne reckons higher wages will lead employers to invest more in workers; the alternative, of course, is job cuts.

The National Farmers' Union is predicting a 35 per cent rise in wages for food-picking staff over the period 2016 to 2021. And what about the impact on the voluntary sector? Parts of the sector are traditionally low-paid, consisting primarily of women - I'm thinking particularly of care staff, whether in elder care or nursery provision. Even if wages have to rise, which is a good thing, it will inevitably put pressure on service delivery. Those organisations that are delivering local government contracts over a period of years will not have wage rises factored into the payments.

Nurseries are already under pressure to provide enough staff to deliver the government's commitment to 570 hours of free childcare a year for three to four-year-olds - but the money the government is providing is not enough to fund all the places. The average nursery has had to absorb a loss of about £34,000 a year because of the funding gap, with 89 per cent of nurseries making a loss on these free places, according to the National Day Nurseries Association.

In addition, this will place staff over the income threshold for auto-enrolment into pensions, which is £10,600 at present (or £204 a week, or £883 a month) and likely to have risen from 1 April. This gives employers additional costs of 1 per cent of each salary, rising to 3 per cent. Again, local government commissioners will not be giving, or be given by the government, extra money to fund this rise.

Wage rises are all good news, and pension contributions are excellent, especially for women workers, but small, service-delivery voluntary organisations are going to have to plan very carefully to manage costs.

Gill Taylor is a sector HR consultant

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