Living Wage and NMW

Will the new National Living Wage cost jobs?

Geoff Riley

25th March 2016

In July 2015, the Chancellor George Osborne announced that a new National Living Wage (NLW) would replace the National Minimum Wage (NMW) for those aged 25 and over starting from 1 April 2016. The NLW will initially be set at a level of £7.20 per hour – 50 pence higher than the prevailing NMW. By 2020, the Chancellor expects the NLW to reach £9 per hour, which is 13% higher than the £8 previously planned. Will the new national living wage lead to significant reductions in employment and higher inflation?

The new remit of the Low Pay Commission (LPC) asks them to recommend the future path of the NLW, with a target of the total wage reaching 60% of median earnings by 2020. On Office for Budget Responsibility forecasts, a full-time NMW worker will earn over £4,800 more by 2020 from the NLW in cash terms

Many firms, particularly those in traditionally low-wage sectors such as pubs, restaurants and social care, have expressed concerns about the impact of this significant rise in labour costs. But while recent research finds that the stock market value of companies likely to be constrained by the NLW fell when the policy was first announced, the reduction was nowhere near big enough to suggest anything other than temporary problems. Nevertheless, the employment effects of minimum wages have long been disputed by economic researchers. 

A new survey conducted by the UK Centre for Macroeconomics (CFM) survey asked panel members whether the National Living Wage (NLW) is likely to lead to significantly lower employment. Here are some of the expressed views of individual economists - useful for adding evaluation into your answers:

Many economists who disagree that the NLW would lower employment stress that it only covers a small fraction of the labour force, so it is unlikely to have a significant effect on aggregate unemployment. 

Michael McMahon (Warwick) argues that ‘the total number of employees earning the minimum wage is a relatively small proportion of total employment’.

Andrew Mountford (Royal Holloway) argues that ‘if the National Living Wage causes firms to invest in the productivity of their workforce and workers to invest in themselves, then it will have a significantly positive effect on UK economic performance in the longer run.’

However Simon Wren-Lewis (Oxford) comments that ‘I suspect that it will lead to significant reductions in employment in the residential care sector, because here the scope for squeezing profits is small and the government partly fixes the price.’

Morten Ravn (University College London) is concerned about distributional effects and believes that ‘it would seem rather fairytale-like to believe that a large increase in wages at the bottom of the distribution could be implemented at no cost of employment of the workers concerned.’

Will the new national living wage lead to a surge in wage inflation and consumer prices?

The Economics Nobel prize-winner Christopher Pissarides (LSE) argues: ‘the main effect will be on prices but given the number of workers on the minimum wage and the overall share of labour in costs the impact will be muted.’ 

Jonathan Portes (National Institute of Economic and Social Research) points out that while the aggregate effect on wages and prices may be small, ‘It will have a significant impact on wages for some workers and hence some companies.’

Jagjit Chadha (Kent) states that ‘In order to maintain relativities, firms may reduce both overall labour hours or total employment numbers and the increase in the wage bill may drive up firms’ costs, which may increase the overall price level and lead to temporarily higher inflation.’ 

The strongest opposition to the NLW is expressed by Patrick Minford, who argues that ‘with such a large rise in low-paid wages, there will be effects right up the wage scale… This will also put upward pressure on prices.’

Michael McMahon (Warwick) echoes the views of some participants that ‘some small upward pressure on inflation is potentially to be welcomed, given how close to deflation we are at a time that interest rates are already low.’ 

Chris Martin (Bath) takes this further by suggesting that the NLW might get the UK out of what he sees as a low-wage/low-pay trap, because ‘raising the cost of labour gives more incentive for firms to invest in skills, an area where the UK is chronically weak at the bottom end of the wage distribution.’

The key unknown for many participants is how quickly the UK economy will grow in the coming years. 

Putting both sides of the argument, Wouter Den Haan (LSE) writes that ‘If the UK economy grows rapidly, then the increase in the NLW is unlikely to matter much for anything except low-wage workers. If the UK economy does not grow rapidly, then the increase in the NLW could have an impact on employment, but inflationary pressure is unlikely in such an environment.’

G7 main expenditure comparisons

NB is 2013 data, but good comparative table:

I note the latest data on household consumption (from OBR) shows households adding to debt at the fast rate for several years - consumption growth is running ahead of income growth by some margin.

AS Revision videos

Follow the link for an extensive list of revision videos from tutor2u:

AS revision videos - various

An idea on building evaluation points for any topic:

A relatively simple method to help you memorise evaluation points.

Good article on monetary policy, with 4 good evaluation points:

We are in danger of becoming addicted to low interest rates

• ANDREW SENTANCE

25 MARCH 2016 • 1:58PM

The returns available to savers have been depressed for many years now CREDIT: ALAMY

This month, we passed the seventh anniversary of the Monetary Policy Committee’s decision to reduce the official Bank Rate to 0.5pc, the lowest level in UK monetary history. Because the EU Referendum and the Budget have been dominating the economic and financial headlines, this anniversary passed almost unnoticed.  However, we have not seen a period of such prolonged low interest rates here in the UK since the 1930s and 1940s. Then, the Bank of England’s official interest rate was held at 2pc from 1932 until 1951 – initially to respond to the problems of the Great Depression and subsequently because of the impact of the Second World War.

Apart from the 1930s and 1940s, I cannot find any period since the Bank was founded in 1694 when interest rates have been held at 2pc or below for as long as the last seven years. So we are living in very unusual times for monetary policy.

I was a member of the MPC when we cut interest rates to 0.5pc in March 2009 and embarked on the policy of Quantitative Easing. It was the right thing to do at that time because of the deepening financial crisis and the need to provide a boost to consumer and business confidence.

But the UK and the world economy have moved on a long way since then. We are now in the seventh year of economic recovery. UK unemployment has been falling fairly consistently for more than four years and the jobless rate is now below its pre-crisis level. The British economy has been either first or second in the G7 league table since 2013 and is likely to occupy one of the top two slots this year as well.

So why are we stuck at a level of interest rates which was set to respond to an economic and financial emergency in 2009? The usual answer to this question is that there is no immediate need to raise interest rates. We are in a low interest rate environment worldwide – not just in the UK – and there are many uncertainties affecting the global economic outlook. In addition, inflation remains subdued, particularly since the recent falls in the oil price.

However, this line of thinking does not take into account the potential problems which a prolonged period of very low interest rates may be creating for the economy at the same time.

There are four key negative consequences for the economy which should be concerning central banks around the world.

First, the returns available to savers have been depressed for many years now, while inflation has continued to erode the value of savings. Despite being very low recently, average inflation since interest rates were cut to 0.5pc has been over 2pc. A situation where real (ie inflation-adjusted) interest rates are negative means the value of savings is being eroded over time, not increasing. This offers poor incentives to individuals to save for the future and makes it increasingly difficult for people to provide an adequate income in retirement. While a temporary period of low interest rates can be tolerated by savers, if this persists for many years it risks undermining the notion that saving is a worthwhile and productive activity.

 Second, low interest rates encourage consumers to take on more debt – precisely the problem which created the difficulties that led to the financial crisis in the first place. Unsecured lending - such as overdrafts, bank loans and credit card debt - is already growing at about 6pc, according to the latest figures. The British Bankers’ Association said last week: “Households are increasingly taking advantage of low interest rates by taking on more unsecured borrowing.” Mortgage borrowing has also been picking over the past two to three years.

Third, house prices are being pushed up – particularly in London and the South East – by the availability of cheap money. Official figures last week showed that UK property prices were nearly 8pc higher than a year ago. The average UK house price is now worth nearly £300,000. While people who are already homeowners continue to benefit from low interest rates, high house price inflation penalises younger people trying to get on the first rungs of the housing ladder – the so-called “Generation Rent”.

Fourth, the longer we continue at the current level of interest rates, the more likely it is that businesses and individuals treat this as the normal state of affairs. That makes it harder for the Bank or other central banks to wean the economy off the monetary medicine and establish a level of interest rates which is in line with or higher than inflation. The longer this period of very low borrowing costs continues, the greater the risk we develop an economy addicted to extremely low interest rates, in which even a small rise in rates is seen as a big shock to the system.

House prices are being pushed up – particularly in London and the South East – by the availability of cheap money

To avoid getting caught in this trap, central banks in economies which are performing reasonably well, like the UK and the US, cannot afford to delay much longer. Indeed, the Federal Reserve started the process of raising the US interest rate in December, and a number of policy-makers are now suggesting there could be another upward move in April.

In the UK, the Bank should be taking the opportunity afforded by rising interest rates in the US to make the first moves here too, though the uncertainty created by the EU Referendum is likely to prevent any decision until after June.

There will always be some short-term reason for delaying a rise in interest rates after such a long period at near-zero levels. The current issues which seem to be holding back the Bank are uncertainty about parts of the global economy and low inflation. But waiting until all the indicators are flashing red and pointing to the urgent need for higher interest rates means it has almost certainly been left too late.

The job of an independent central bank is to take a long-term view and to look beyond the short-term fluctuations and uncertainties. That means taking account of the negative consequences of a prolonged period of exceptionally low savings returns and borrowing costs and not continually postponing the process of gradually returning interest rates to more normal levels.

Andrew Sentance is senior economic adviser at PwC and a former member of the Monetary Policy Committee

Marginal gains - are you:

The new Apprenticeship Levy - gold standard or sub-standard?

This is an example of a supply-side policy that has really good intentions, but faces numerous pitfalls. Previous attempts to create government-funded training schemes collapse amidst fraud by the training providers. This article highlights the potential value (placing the burden on employers, and connecting them directly to providers) versus the pitfalls - real skills? Employers seeking to mitigate the costs elsewhere? In addition to this, consider the fiscal aspects, and contrast it with NIC:

Is the employer levy a big deal? Definitely maybe

matt hamnett     20th November 2015 at 00:00 

The apprenticeship landscape is changing, but the ramifications aren’t yet clear

In less than 18 months a new apprenticeship levy will be imposed on large employers, changing the landscape of further education and apprenticeships beyond recognition. Definitely? Maybe.

When thinking about how big a deal the levy might be, it’s worth asking: why now? Levies aren’t a new idea. We had them in most sectors for the two decades up to the early 1980s. A couple still exist, in the construction and engineering sectors. In the 2003 skills strategy White Paper, the Labour government promised to support the development of new sector-based levies on a voluntary basis. Lord Leitch offered equivocal support for the same in his 2006 review, and the government followed suit in its 2007 White Paper (I know, I wrote it). The brilliantly Yes Minister talk of the time was of “post voluntarism” if employers didn’t get their act together and invest in skills.

So, have ministers finally tired of employers’ failure to recognise the way that skills drive productivity, which drives profitability and growth? Maybe. Or is the government just skint and in desperate need of new ways to fund tertiary education? Definitely. Are levies a proven policy measure, guaranteed to change behaviour? At best, maybe.

The evidence is pretty patchy. There hasn’t been a serious evaluation of the old industry training board regime. Evidence from overseas (France, Quebec, Malaysia and Australia have all operated levy regimes at some point) suggests a series of flaws, issues and risks.

What could go wrong?

Clunky and expensive administration can take resource away from training and undermine employer engagement. The Skills Funding Agency (SFA) is currently developing a digital voucher exchange to support the new apprenticeship levy, with employers that want to spend more able to buy additional vouchers at a discounted rate. What could go wrong? I’m fractionally too young to remember the individual learning accounts fiasco. Let’s hope that the survivors still in the Department for Business, Innovation and Skills and the SFA shout loud and often about the fractures, failures and frauds that killed an otherwise perfectly sensible attempt to put purchasing power in the hands of the customer.

Even where employers do engage in training rather than bearing the levy as a tax, there is little evidence of productivity improvements flowing from levy regimes. The risk is that we will see further growth in content-light apprenticeships that help the government to hit its target of creating 3 million starts but miss the point: better skilled young people, better able to realise their potential, improving business productivity and performance.

The other big flaw in previous levy regimes is that small firms tend to lose out because the levy unfairly hits their finances, and because they find it hardest to engage with whatever arrangements are put in place for them to access levy-funded training. On this point, the government has definitely got it right. Only “large” employers will be required to pay the levy, and they may be permitted to spend it in their supply chain – a great idea salvaged from the wreckage of the “employer ownership of skills” pilots.

What’s going to happen?

So what’s going to happen in 2017? For large employers faced with the prospect of a new tax, there are some big questions and opportunities on the horizon. We should assume that finance directors across the nation will soon be asking their HR colleagues a simple question: “How do we get our money back?” From that starting point stems either a serious discussion about how the business will invest in emerging talent, or one about what can be badged to ensure funding is reclaimed.

Some will ultimately choose to do nothing and bear the levy as another annoying tax. Some will do enough to spend their levy one way or the other. Others will be receptive to the intended behavioural nudge and get serious about training. Other policy measures – including a serious assault on bureaucracy, clearer and simpler marketing than we’ve ever seen, and (my favourite) human capital reporting requirements for large employers – will be required to cement the last option as the course taken by the majority.

Employers will also have unprecedented (if still limited) choice over who they work with to deliver their apprenticeship programme. Unprecedented because funding will, finally, follow the employer. Limited because only registered providers will be able to play. Again, different employers will make different decisions. Some will rethink their choice of provider now they’re really free to do so. Others will demand that their commercial learning and development suppliers enter the apprenticeship space. This could have profound implications for providers.

And what of providers? Grant funding ripped out of our grant letters; the dynamics of the sales process inverted; the opportunity to increase apprenticeship volumes without having to worry about whether government will fund in-year growth; employers compelled to engage with apprenticeships whether they like it or not; and the threat of new and commercial providers encroaching into our traditional backyard.

Threat? Definitely. Opportunity? Maybe. We set up Hart Learning and Development as a discrete business, at arms-length from North Hertfordshire College, to help us stave off the threat and seize the opportunity of the levy era. For me, then, is the levy a big deal? Definitely. Will it change everything? Maybe.

Matt Hamnett is principal of North Hertfordshire College and chief executive of the Hart Learning Group