Study: Pay rises hit profit at the top, not employment at the bottom

Whenever there are proposals to increase pay, business lobbyists argue the move will lead employers to cut their staff, but the latest report from the Low Pay Commission (LPC) has busted this myth.

28 Nov 2018| News

Image taken from the Low Pay Commission Twitter page

Analysing the impact of the National Living Wage (NLW) – a higher minimum wage rate – in 2016, and its uprating in 2017, the LPC found that redundancies had been rare as a result of increased pay and employers had found other means to offset higher labour costs.

“Employers tell us they have responded to the NLW by absorbing the cost through lower profits, raising prices where they can and making changes to differentials and workforce structures, instead of through large reductions in employment,” the report stated, adding that “employment rates for the groups of workers most likely to be paid the NLW continue to grow faster than for the economy as a whole”.

Restructuring has largely revolved around removing managerial levels and reducing the gap in pay between higher and lower earners.

Further, the LPC found that increases to the statutory minimum had pushed pay up not only for those paid at the NLW, but for the bottom 20% of earners (those earning up to £9 per hour) in total, accounting for five million workers.

However, it was noted that there has been a sharp increase in employers paying just above the legal minimum (at around the £8 mark), perhaps reflecting a tendency for businesses to use statutory minimums as a floor to aim for.

Stakeholders told the organisation they thought improving productivity would be key to adapting British industry to wage increases in the future.

These findings support the framework for reform laid out in the Institute of Employment Rights’ Manifesto for Labour Law, the recommendations of which include raising low pay through the introduction of the Real Living Wage (i.e. one that covers living costs) and rolling out sectoral collective bargaining – a mechanism by which unions and employers’ associations negotiate minimum pay and conditions across entire industries.

Our proposals were based not only on improving the lot of the lowest paid and reducing income inequality, but also boosting the economy through increases in productivity. Currently, weak legislation around pay rates has nurtured a culture of insecure work, low-paid work in the UK, in which employers compete primarily on cost and reduce these costs by slashing labour rights.

This environment has drained economic productivity, which is currently at its lowest level on record when compared with our major international competitors.

Raising wages incentivises employers to invest in new ways to improve their businesses, rather than simply through cost, such as research and development to create higher quality products and services, as well as to improve productivity.


Read more about our Manifesto for Labour Law