Are retailers ready for the National Living Wage?

What are the costs and what are the opportunities?

On the face of it, you might expect retailers to be concerned about the Chancellor’s new flagship policy of the National Living Wage, with a hike to over £9/hour by 2020 and an increase to £7.20 from April next year.

Yet most management teams may have received the news with relative calm. In fact, several retailers have publicly welcomed the policy and even got ahead of it – for example, Ikea, which has made the decision to pay all its staff the Living Wage from next year. Indeed, in the US Zeynep Ton from the MIT Sloan School of Management has argued that retailers choosing to invest in their workforce reap benefits in increased sales and profits. The flip-side of the UK Government’s policy is that, despite it representing a significant cost, retailers are also clearly seeing it as an opportunity to counter negative perceptions about retail pay and get the edge on their competitors in terms of recruiting and retaining talent and communicating a positive story to key stakeholders.

There are a few other reasons for retailers welcoming the policy.

Firstly, the Chancellor is arguably taking a view that a higher wage economy could drive up productivity, as businesses look to optimise what they get out of this higher cost base. It’s possible that some retailers may look to mitigate the impact; for example by reducing headcount over time, or driving to recruit more under-25s who will not be subject to the new living wage.

Secondly, retailers may see some of the cost flowing back in through the tills, as a higher wage has a positive impact on consumer spending. The Chancellor has used considerable sleight of hand in making the Budget headlines about his new wage policy rather than his reduction in tax credits, even though the £4bn wage increase makes up for just a third of the total £12bn welfare cuts. However, interestingly the IFS has pointed out that those who will benefit from the higher minimum wage may live in middle or upper income households, often with somebody else in the household on significantly higher earnings (and therefore not entitled to tax credits or impacted by their removal). This increase in spending power for middle income earners could be good news for retailers.

Thirdly, this does provide certainty for a sector which has expected statutory wage increases for some time but has sat on months of uncertainty about the level of the rise – particularly in the run up to the Election. Many retailers may feel the quid pro quo of a pro-business, Conservative administration willing to cut corporation tax even further is worth the trade-off.

Finally, retailers have some other battles to fight at present. Most retailers recognise that as a flagship policy of Osborne, which will not be opposed by the Labour Party, they have little chance of getting concessions  – and a lot to lose reputationally by opposing a pay rise for the British public. Retailers have been very actively criticised in recent months – in April, retailers were criticised by Citizens UK for paying their workers poorly, subsidised by the taxpayer, and some of the major retailers have been lobbied on living wage at their recent AGMs. At the same time, there are other policies to get to grips with for the sector with Government – influencing the Business Rates Review, Sunday Trading proposals, the impact of the EU referendum, and the continuing devolution debate come high on the list.