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Low Pay Commission "right to be cautious over National Minimum Wage increase but remit should be extended to prevent future falls in its real value"
The Low Pay Commission's recommendation for a 3% increase in the National Minimum Wage strikes a good balance in helping to regain some of its lost value, while not threatening to undermine employment levels, according to a new report by the Chartered Institute of Personnel and Development.
Looking further ahead it is also imperative that increases in the NMW ahead of earnings growth are only considered as a result of sustained improvements in productivity, and are not used as a tool to attempt to drive increases in productivity, the report 'Tackling low pay' argues.
However the CIPD report, which is based on a survey of more than 1,000 employers and further consultation with CIPD members, also recommends that the LPC's remit should be extended to prevent future large falls in the real term value of the NMW.
The report is being published as the Government considers its response to the Low Pay Commission's recommendation to increase the adult rate of the NMW by 19p (3%) to £6.50 per hour from October 2014.
"The LPC recommendation of a 3% increase in the NMW in October 2014 is a cautious but welcome first step in restoring the real value of this minimum standard for low wage workers," commented Mark Beatson, Chief Economist at the CIPD.
"We expect to see further real terms increases in the NMW in the coming years to make good the value lost. However, this relies on productivity growth - real wages can't rise sustainably without it.
"Government, employers and employee representatives need to work together to ensure that the UK's long-standing productivity problems are addressed so that this momentum can be maintained. Ultimately, real progress on low pay relies on encouraging employers to invest more in training and career progression opportunities so the lowest paid workers can lift themselves out of minimum wage roles and add greater value to the firms that employ them. The UK performs poorly compared to other developed nations on both the sheer number of low paid roles and the opportunities for those in them to grow and develop in their roles.
"Equally, the social and economic case for a national minimum wage is now well established, so we need to ensure we do not end up in a similar position in the future, where the NMW falls substantially in real terms. Such falls undermine the purpose and credibility of the NMW, and create the kind of 'cliff edge' of affordability business now faces as pressure mounts for gradual real terms falls over a number of years to be reversed in a far shorter time period. The LPC and government should consider this in future reports."
Charles Cotton, Reward Adviser at the CIPD, said:
"Employers have generally accepted the principle of the NMW, and have found its implementation has had less of a negative impact than many feared when it was introduced. However, understandable calls for the reversal of its decline in real value in recent years, combined with ongoing debate about the desirability of placing the Living Wage on a more statutory footing, are causing concern in some industries where tight profit margins mean substantial rises in salaries could pose a real threat. This has led to calls in some quarters for a more regional or sectoral approach to the setting of the NMW.
"We believe there are significant practical difficulties and potential unintended consequences associated with both of these approaches. Instead, efforts need to focus on the investment in skills and innovation required to boost productivity, or a reassessment of the business and funding models in these sectors.
"Taking the care sector as an example, there is little doubt that a sudden restoration of the NMW to its pre-recession level would risk putting many care service providers out of business. Here, there is an onus on policymakers and society to consider the value it places on elder care, and to ensure that funding is available to cover the restoration of the real value of care workers' wages."
The CIPD's 'Tackling low pay' report found that:
* A majority of employers (64%) think that policy makers should be trying to ensure that the National Minimum Wage keeps its 'real value'. A fifth (19%) did not think this should be a priority for policy makers and 17% did not know.
* There is widespread support from employers that in the future the National Minimum Wage should be linked to a measure of inflation so that it does not lose its 'real value' again. Nine out of ten (89%) of employers think this should be the case, with just 6% saying no and 5% who did not know.
* Organisations inside London are less likely to believe that a substantive hike in the NMW to the Living Wage (£8.80p an hour inside London) would have an adverse impact on jobs. Of these organisations 18% would reduce the number of hours available to staff, 14% would introduce a pay freeze, 8% would make redundancies and 8% would freeze recruitment.
* Organisations that employ staff on the adult national minimum wage rate that are based outside London are less likely to absorb the costs associated with a significant rise to the Living Wage (£7.65 outside London) and more likely to try to increase employee productivity or reduce workforce costs.
* Nearly a fifth (18%) of these employers report they would be forced to freeze recruitment, 16% would make redundancies, while 14% say they would be forced to restrict wage growth across their organisation. Almost a quarter (24%) of these organisations would reduce the number of hours offered to employees.
The full report 'Tackling low pay' can be downloaded at: www.cipd.co.uk
13th March 2014