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Ending low pay: how UK business has met demands to boost wages

When Paul Smith first started running a bar in Stirling, in central Scotland, in 1981, the norm in hospitality was for wages to account for about 10 per cent of sales. Now, he operates pubs, clubs and other venues across the country in an industry where staff costs absorb some 36-38 per cent of sales.

“It has trebled in the time I’ve been in hospitality,” says Smith, managing director of Castle Leisure Group. “There’s no doubt that in the early 1980s hospitality was rightly criticised as an underpaid sector. The industry has addressed it. You can no longer say hospitality is underpaid.”

This striking advance is in large part due to one of the few policies that has won sustained support over time from both Labour and Conservative governments. Introduced in 1999 by Tony Blair, the UK’s minimum wage rose steadily until 2015 — when the then chancellor, George Osborne, turbocharged its growth with a target for his rebranded “national living wage” (NLW) to rise to 60 per cent of median earnings.

This week, the hourly rate will rise again by almost 10 per cent to £11.44 and reach two-thirds of median earnings, hitting a five-year target set in 2019 to end low pay, by this OECD definition, and giving the UK one of the highest wage floors in the rich world.

This is widely viewed as a policy triumph: it has lifted living standards for the lowest paid, without significantly hurting their chances of finding work.

The UK is not alone in seeking to protect low-paid workers against higher living costs, with Germany, France and New Zealand among those who have also raised minimum wages rapidly in recent years — yet Britain has undoubtedly been among the most ambitious.

But ministers in the UK have now called a halt to the relentless upward rise in the wage floor. Instead, the Low Pay Commission, which advises the government on where to set the NLW, has been given a new remit to keep the main adult rate at two-thirds of median earnings, while seeking to raise the lower youth rates as fast as possible without hitting job opportunities.

The pause will come as a relief to business leaders, who had warned that many smaller employers were finding it increasingly difficult to manage rising wage bills — many have also lifted pay for more senior staff — and were starting to make uncomfortable trade-offs.

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“Laudable as the goal is, it is not without dire consequences for many industries, including hospitality,” says Smith, who has cut trading hours and the staffing of shifts to control his costs. “We employ fewer people . . . If we were to pass on everything in price, our customers could not afford to pay.”

“The answer cannot be to continue to ramp it up further,” adds Neil Carberry, chief executive of the Recruitment & Employment Confederation. Kate Nicholls, chief executive of the trade body UKHospitality, says that with many smaller venues now closed two or three days a week because sales would not cover their costs, “we need a pause”.

Advocates for workers say they have heard similar warnings many times before — and yet most businesses have always coped, whether by trimming profits, raising prices, automating or finding ways to use staff better.

In the past two years, despite successive sharp increases in the NLW, the number of workers on minimum wage has actually fallen — against all expectations — because employers found they needed to pay above the statutory rate to secure staff in a fiercely competitive labour market.  

Kate Bell, assistant general secretary of the Trades Union Congress, says this makes the way ahead on the NLW clear: “we think we can be more ambitious”.

But even supporters of a high minimum wage now say the focus of policy should broaden to address other concerns around low-paid work, and to boost living standards for people higher up the pay scale, whose earnings have been stagnating for more than 15 years.

“It’s a very blunt tool,” Alice Martin, head of research at Lancaster University’s Work Foundation, says of the policy, adding: “the big challenges of the 21st century labour market are not just of pay. A lot of workers are not getting the security or flexibility they need in their work.”

Nye Cominetti, principal economist at the Resolution Foundation, says that in the absence of higher productivity — which remains elusive — employers could only manage higher labour costs by raising prices, accepting lower profits, cutting jobs or squeezing pay elsewhere. “At some point, these things are going to bite,” he warns.

Labour has promised to ensure the NLW reflects people’s real living costs if it wins power in the upcoming UK general election. But it is planning a broader drive to restore the power of unions and give workers more security and control over their hours and terms of employment.

Line chart of Growth in median hourly pay since 1998 showing UK hourly pay has grown fastest in low-paid occupations

The LPC has also said that enforcing existing rules and addressing the precarious nature of low-paid work might achieve more than pushing the wage floor ever higher. “The NLW has been very successful but it is not a panacea . . . Low-paid workers’ earnings can vary substantially and many jobs simply offer too few hours,” it said in advice to ministers published last week.

Others warn that as the NLW rises, there is an increasing risk that employers will cut workers’ contracted hours and demand more of staff — while struggling to offer the same opportunities for promotion.

There is also a widespread perception that jobs have become more stressful and less rewarding because employers have begun to scrimp on labour, with restaurant staff expected to cover more tables, office and hotel cleaners to cover more ground, and care staff to rush between more clients.

Matthew, a 29-year-old who has worked at two branches of fast-food chain Nando’s over the past year, says his job there “gradually got worse” because several team members who left were not replaced — including supervisors needed to train new recruits.

“Over the whole of the summer and up to Christmas we were short staffed . . . Sometimes we had to leave customers waiting an hour at the door, turn off Deliveroo — you have to be a strong person,” he says.

Sometimes, this tips over into outright abuse of the rules.

Tracey, a care worker, says that while she was paid above the minimum wage, she was constantly out of pocket because her employer only covered petrol costs in between visits, not on the way to her first client.

Meanwhile, employers’ main concern is that it is increasingly expensive for them to maintain pay differentials between entry level jobs, and those that used to be paid significantly better.

In previous years, many big companies have allowed the gap between pay grades to narrow — for Matthew, moving up to a supervisory role at Nando’s would boost his pay by just 30p an hour.

But employers are reluctant to let the gaps between grades shrink further.

Nicholls says this week’s 10 per cent NLW increase will push up overall wage bills by 17 per cent across the hospitality sector, because employers need to boost pay for more senior staff to maintain routes for progression.

“We will have ended low pay, but with more people feeling low paid than ever,” says Rain Newton-Smith, chief executive of the CBI business lobby, who argues that the priority is to lift productivity and pay across the economy.

A minimum wage is not enough to ensure decent living standards, she adds. While the policy has officially put an end to low hourly pay, in-work poverty remains acute — for people who are unable to work many hours, or for those whose benefits have not risen in line with earnings.

Meanwhile median earnings are no higher now than they were in 2008.

Paul Nowak, general secretary of the TUC, argues that one clear lesson can be drawn from the way businesses have adapted to the NLW over time.

In 1997, “Britain was full of employers and employers’ organisations predicting the minimum wage would cause mass unemployment and economic ruin,” he says, drawing a parallel with recent business alarm over the potential impact of Labour reforms to workers’ rights.

“The arguments are exactly the same as they were 25 years ago . . . Now is the time to forge a new political consensus on tackling the scourge of insecure work.”

Via

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