Will the Living Wage just be “the tip of the iceberg for UK employers”?

Otmane El Rhazi from Mindful Money » Shares.

Retailing giant Next has become the latest group to anticipate that the Living Wage will increase costs in its outlets, expecting prices to rise 6% in total by 2020.

But it only attributes a 1% rise to the effects of the Living Wage.

The introduction of the Living Wage means minimum wages will be set at £7.20 an hour for over-25s from April 2016, forecast to rise to £9.35 in 2020.

On Tuesday Whitbread warned it will have to increase prices in some of its chains, which include Costa Coffee, Premier Inn and Beefeater Grill, to meet the costs of the Living Wage.

With Kingfisher, owner of B&Q, and JD Sports issuing results next week, investors may not have to wait too long to hear some more corporate predictions on the impact of the Living Wage.

Laith Khalaf, senior analyst at Hargreaves Lansdown highlighted that Next also identified the biggest cost associated with the introduction of the Living Wage is actually increasing the wages of staff who actually earn above the Living Wage.

Like most employers, Next will want to maintain pay differentials between its lowest paid staff and more senior employees. Consequently it estimates the cost of bringing employee pay up to the Living Wage to be £11m in 2020 but the cost of paying more to employees earning above the Living Wage to be £16m.

Khalaf said: “This corroborates the analysis of the Living Wage conducted by the Office for Budget Reponsibility in July, which estimated that around 3.25m people earning above the Living Wage would get a pay rise, compared with 2.75m people earning under the Living Wage.”

Next also warned of a possible ‘inflationary loop’ which could ensue from the Living Wage as it is pegged to the national average earnings which it may push upwards.

Khalaf said: “Paying employees the minimum wage could be the tip of the iceberg for UK employers, because increasing salaries for the lowest paid has a knock on effect on the wage demands of other workers. No junior manager is going to be happy if they are being paid the same as the newest trainee. This is likely to result in an upward drag on salaries, as companies filter progressively smaller wage increases up the pay grades. Employees earning at, or just above the Living Wage can expect to feel the biggest benefit, aside from those who have had their pay brought up to the new minimum.”

While Khalaf asserted that the Living Wage is going to increase the pay of millions of people, which is hugely positive, he added that there “may be a cost which can be counted in jobs, prices and profits”.

He said: “We are beginning to see companies warning they are going to have to increase prices to cope with the additional cost of the Living Wage, and we should expect more announcements of this sort. The high street retailer Next rightly identifies the risk of an inflationary loop, stemming from the fact the Living Wage is linked to average earnings, which it should push up. With inflation at close to zero this doesn’t look like an issue worth worrying about right now, but in five years’ time, an inflationary wage spiral may present more of a problem.”