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Hot topic, part two: Mandatory living wage

In the first all-Tory budget since 1996, chancellor George Osborne declared that "Britain deserves a pay rise". However, with the UK's productivity lagging behind other developed nations can we really afford to raise wages?

The government is taking a gamble in introducing the national living wage, hoping that job losses will be limited – as was the case with the introduction of the national minimum wage. The independent Office for Budget Responsibility’s initial assessment included a figure of 60,000 for employment reduction (just 0.2% of total employment).

The UK’s low pay problem is due to low productivity. The national living wage could pay its way if employers increase the productivity of workers affected by investing in better systems and equipment, better training, and by redesigning jobs so they add more value per hour.

However, employers usually select less challenging options such as passing the cost on to customers, taking a hit on profits, or cutting costs elsewhere.

In sectors where staff turnover is high – often low pay industries – employers could simply recruit more people under 25, who won’t be covered by the national living wage. The social care sector certainly could go into meltdown unless more money comes in. 

The national living wage will provide some income protection for people affected by changes to in-work benefits, although it will also increase pay for those who aren’t in the poorest households. But if the government has made the wrong call about its effect on employment, some people will be much worse off. The Low Pay Commission is the best early warning system we have, so the government needs to maintain its expertise and independence. 

Government can also improve its odds if the national living wage is introduced alongside measures to increase the productivity of low-paid staff. But the productivity plan focused on young people, with little to say about later-life workers. Let’s hope the Spending Review puts this right.

Mark Beatson is chief economist at the CIPD

Read Graham Salisbury's (head of HR at ActionAid) view on this Hot Topic