National Living Wage: The Time Bomb is Ticking
April 2024 saw the new National Living Wage (NLW) come into force in the UK. For many workers on lower rates of pay, the jump from £10.42 to £11.44 per hour was a welcome income hike after months of high inflation and climbing interest rates. But the surprising scale of the NLW rise (9.8%) put many employers on the back foot, as most predictions of the rate increase had been closer to 7%.
What is the National Living Wage?
For those less familiar with the NLW, its history goes back over 20 years, when minimum wage legislation was first passed by the Labour government. The National Minimum Wage (NMW), launched in 1999, required all UK employers to pay at or above a statutory minimum hourly rate. The NLW evolved much later and was phased in between 2016 and 2020. Originally it applied only to over-25s and stipulated a minimum rate of £7.20 per hour. After a drop in the qualifying age to 23 in 2021, an even lower age-limit of 21 was introduced for NLW in April 2024.
This year’s NLW increase immediately put extra money into millions of pay packets. Full-time adult workers on the minimum wage saw their annual pay climb by £1800, while a 21-year-old previously on the lower minimum now qualified for the higher NLW and saw their wages grow by £2300 per year.
Effects of National Living Wage: What Our Research Says
The 2024 rate-rise was great news for qualifying workers, but less positive for company bosses poorly prepared for the 9.8% hike, an increase that far outstripped average wage inflation. Thousands of UK companies are still coming to terms with the fallout, from higher payroll costs to eroding pay gaps and skewed salary structures.
In our HR DataHub report ‘The National Living Wage: A Ticking Time Bomb?’ we put our pay benchmarking platform to work to assess the impact of the new NLW. By scanning millions of pay data points across the UK market, we compare pay levels pre and post April 1st, 2024, when the latest NLW rate became law. Our dive into the data shows that from the moment it launched, the new NLW had an instant effect, causing pay gaps to contract by an average 10% across a swathe of sectors. But the worries for employers don’t end there. As the NLW continues to uptick and outpace future pay increases for workers in more senior roles, pay gaps are set to shrink even further. All this will tighten the squeeze on companies to preserve their pay differentials and hierarchies.
Pressure on Business is Building
Wage inflation isn’t the only headache for business managers impacted by the updated NLW legislation. Growth in salary minimums and knock-on pay compression can upend carefully balanced salary structures. Junior employees could end up earning as much or even more than their line managers. Or a new starter could be entitled to take home the same wage as a highly experienced colleague with many years of loyal service under their belts. All this upward pressure on the pay of lower grades can have a demotivating effect on staff morale, especially for more senior employees who are rewarded with comparatively modest pay rises and see their differentials gradually deplete year by year. This could test the loyalty of key staff and make it harder for companies to motivate and retain their most valuable people.
NLW: The Time Bomb is Ticking
The latest NLW legislation guarantees more pay for more people. As our report clearly shows, it also represents a ticking time bomb for businesses up and down the UK. Our survey sampled 500,000 job postings across 50 roles in retail, hospitality, logistics and manufacturing, some of the sectors most profoundly affected by the NLW increase. It tells us which roles are most impacted, changes in average pay, where pay gaps are reduced and by how much. More worryingly, it shows how incremental NLW rises over time is catalysing a ripple-effect that is invisible to many business leaders today and storing up trouble in the years to come.
How to Defuse
Of course, it’s not all bad news for business. Although the evolution of NLW is outside their control, there’s plenty companies can do to get ahead of its consequences and ‘defuse’ the time bomb. As well as in-depth analysis of the NLW pay landscape today, our report gives a ‘to-do’ checklist of ways to mitigate negative effects, including advice on how tools like HR DataHub give you a clearer understanding of the pay market in real time and signal useful trends insights to help you bake in protections when preparing your pay strategies.
To find out more, read our report: ‘The National Living Wage: A Ticking Time Bomb? A Data-Driven Report on the Real Impact of the 2024 Increase in the National Living Wage’
.avif)
