15 09 25 bcc submission to the lpc

British Chambers of Commerce Submission to the 2015 NMW Consultation Summary of Recommendations Although the UK jobs market remains robust, the recent consecutive rises in unemployment, and a slowing global economy, are a reminder that the UK recovery is still in need of care and attention.

We would urge the Commission to act with restraint and make recommendations relating to the National Minimum Wage (NMW) rates, through an evidence-based approach. This is important in light of recent political intervention and the creation of the National Living Wage. If further excessive National Minimum Wage increases are adopted due to political pressure, this could cause higher unemployment and even bankruptcies.

We recommend the following increases for October 2016: • 2.4% increase in the Adult NMW rate (16p) • 2.0% increase in the Development rate (10p) • 1.8% change in the Youth rate (7p) • 1.3% change in the Apprentice rate (4p) We are aware of significant business concerns surrounding the introduction of the National Living Wage (NLW), its future trajectory, and its interaction with other wage rates. We have mentioned these initial concerns in the submission below, and will expand on our concerns when the Commission consults on the NLW in due course.

UK GDP forecasts: In our Q3 2015 economic forecast, issued on 10th September 2015, we predicted full year UK GDP growth for 2015 of 2.6%, higher than our previous forecast for the year of 2.3%. The upgrading of our growth forecasts is mainly due to stronger growth than we previously predicted in services output and in consumer spending. We are currently expecting growth of 2.7% in 2016 and 2017. This implies growth of 2.7% in the period between October 2016 and September 2017. Overall, the BCC’s latest forecasts of UK GDP are broadly in line with the latest projections from other leading organisations, including the Office for Budget Responsibility and the IMF. UK Inflation forecasts – prices and wages: For CPI annual inflation we are predicting, in full-year terms, 0.1% in 2015, 1.2% in 2016, and 2.0% in 2017. This implies an average CPI inflation rate between October 2016 and September 2017 of 1.8%. Wages, which rose at a consistently slower pace than prices until recently, have edged up in recent months, rising further above falling inflation. Pay rises in the private sector remain considerably higher than in the public sector. Our forecast is that earnings growth will continue to edge up in the next few years, in line with higher economic activity and rising productivity. We now predict that total earnings growth (including bonuses) will average 2.5% in 2015, 3.6% in 2016 and 4.3% in 2017.

UK unemployment forecasts: In our Q3 2015 forecast we predict that unemployment will fall from 1,852,000 in Q2 2015, to 1,752,000 in Q2 2016, 1,667,000 in Q2 2017, and to 1,662,000 in Q2 2018, a net overall fall in the jobless total of 190,000 over the next 3 years. Employment will rise in the next few years, but some factors would still exert upward pressure on unemployment: Government spending cuts will cause additional public sector job losses, while productivity increases will limit the need for new workers. This forecast does not take into account the introduction of the NLW, which the OBR estimates will lead to 60,000 job losses when it is introduced next year.

The jobless outlook will be critically affected by what happens to inactivity and to productivity. Trends in these areas are highly uncertain but both, particularly productivity, are key factors when considering the appropriate level of the NMW. In general, falls in unemployment will be smaller, or rises higher, if: 1) more people than envisaged abandon inactivity and seek work; and 2) if productivity increases more rapidly than predicted. Furthermore, although the UK jobs market remains robust, the recent 1

consecutive rises in unemployment are a timely reminder that the UK recovery is still in need of care and attention.

Youth unemployment forecasts: The UK youth unemployment rate will remain much higher than the national average. But, with total UK unemployment forecast to fall, youth unemployment will also decline, we are forecasting that total youth unemployment (people aged 16 to 24) will fall from 739,000 (a jobless rate of 16.0%) in Q2 2015, to 695,000 (a jobless rate of 14.7%) in Q1 2018, a net fall of 44,000.

Productivity: UK productivity has been weak since the financial crisis but we expect a gradual improvement in the next few years. Strengthening UK productivity growth is a major medium-term challenge. A temporary weakness in productivity is acceptable during a recession, because it alleviates human misery and helps businesses to retain skills. However, living standards will suffer in the longterm if productivity growth fails to pick up as the economy recovers. In our Q3 2015 forecast we predict annual productivity growth, as measured by output per hour, of 1.4% in Q2 2016, 1.5% in Q2 2017 and 1.8% in Q2 2018.

Implications for the NMW: The squeeze on living standards in recent years has been an unfortunate but necessary consequence of the recession, and the consequent fall in productivity. Low wage increases during the recession made it possible for UK firms to maintain higher levels of employment than would otherwise have been the case. As the economy recovers, there are naturally growing expectations that wages will increase. We have seen evidence of wage increases and increased confidence across the economy, and record low inflation means that in real terms wage increases have been even bigger.

Our forecast envisages a gradual and steady upturn in wages at the national level. But while the scale and timing of national wage rises will be determined in the normal bargaining process, by factors such as labour demand, firms’ ability to pay and productivity, fixing the NMW requires special care to avoid causing damage. This is ever-more important given recent political interference in determining the NMW and the introduction of the NLW. The LPC has to be mindful of the knock on effects on wages further up the pay scale, when increasing the NMW. Many businesses set their wages in reference to the NMW – as such increases in the NMW and NLW will raise the overall wage bill for businesses. A Norfolk Chamber of Commerce members and director of a call centre in Norwich explains this in relation to the NLW increase: “As a service business, nearly 100% of our above-the-lines costs are staff costs. Whilst our lowest paid roles sit above minimum wage, we have always tracked our hourly rates in line with increases to NMW, and this proposed hike in April will force us to review our pricing with clients. This will have a trickle-down effect to consumers, as our clients may be forced to put their own prices up.”

The LPC recommendations should also maintain gradual differentials between the minimum wage rate for different age groups and apprenticeships. In recent years, the number of apprenticeship starts for apprentices aged 25+ has increased, and there have been more apprentices aged 19-24 than 16-18. Maintaining relatively small and gradual minimum wage differentials between age groups will help reduce the impact for employers of a wage hike, e.g. when employees move to a different age band or progress from an apprenticeship to a regular job with the company.

The LPC also needs to consider the regional effects of its NMW recommendation. For example, the potential impact of changes in the North East is greater than some other regions. Unemployment and youth unemployment rates in the North East are higher than the UK average, and median pay is lower.

The Low Pay Commission should be tasked with monitoring the impact of increases to the NMW on employment levels on a regional basis. We support the continuation of a national minimum wage rate,

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but any future increases should take regional impacts into account and not be based on political factors.

The LPC made a 3% increase recommendation in February 2015 based on strong employment growth figures. Yet the recent consecutive rises in unemployment should be a warning to the Committee that care needs to be taken to set a NMW rate which does not have adverse effects on employment and unemployment.

If current reasonable expectations about continued growth and rising productivity turn out to be too optimistic, an unduly high NMW could cause higher unemployment, force businesses to stop trading, and may even result in bankruptcies. The adverse effects of an unaffordable NMW will be predominantly concentrated amongst SMEs. The appropriate NMW rate: From April 2016, with the introduction of the National Living Wage, the ‘adult’ NMW rate will effectively only apply to 21-24 year olds. Given that there has been a political decision to introduce a new wage rate for people aged 25 and over, we believe it is important to keep a separate NMW rate for the 21-24 age group. The high levels of unemployment amongst those aged 24 and under justifies this pay differential, and is likely to help reduce unemployment among this age group. Given relatively high youth unemployment forecasts coupled with the global and domestic risks still facing the UK economy, there is a strong economic case for an increase in the adult NMW rate of 2.4% in October 2016, broadly in line with forecast earnings increases. This will mean an increase of 16p in the adult NMW, to £6.86.

Since the youth unemployment rate is forecast to remain much higher than the national average, we recommend that absolute levels and planned increases for younger age groups under 21 must stay lower than the adult NMW rate. We recommend a similarly moderate rise for the apprenticeship rate, especially given the 21% increase which is coming into effect in October 2015 - the full effects of which are as still uncertain. The following table summarises our proposals for the 2016 NMW rates, and compares them with the actual rates for the period 2011 to 2015.

Year

25 and over

% change

21 and over*

% change

18 to 20

% change

Under 18

% change

Apprent ice**

% change

£7.20 £6.70 £6.50

7.5% 3.1% 3.0%

£6.86

2.4%

£5.40

2.0%

£3.94

1.8%

£3.34

1.3%

£6.70 £6.50

3.1% 3.0%

£5.30 £5.13

3.3% 2.0%

£3.87 £3.79

2.1% 1.9%

£3.30 £2.73

20.9% 1.9%

£6.31 £6.19

1.9% 1.8%

£6.31 £6.19

1.9% 1.8%

£5.03 £4.98

1.0% 0.0%

£3.72 £3.68

1.1% 0.0%

£2.68 £2.65

1.1% 1.9%

2011 £6.08 2.5% £6.08 2.5% £4.98 1.2% £3.68 *21-24 from April 2016. **For apprentices aged 16 to 18 and those aged 19 or over who are in their first year.

1.1%

£2.60

4.0%

Oct 2016 suggestion 2016 (from April) 2015 (from Oct) 2014 2013 2012

The effects of changes to other business costs: The higher input costs derived from higher minimum wages and other government policy choices, such as the introduction of pensions automatic enrolment, far outweigh any of the tax incentives that ministers have announced such as the cut in corporation tax and the extended employment allowance.

A South Wales Chamber of Commerce member and sound equipment company in Newport summed this up by saying: “The increase between now and next April is quite high if you employ even a few staff on low wages, coupled with the fact that we now have to deal with compulsory Pensions [autoenrolment] which will also add to our costs. It does not matter that the government is making a few allowance increases - they will not really help and don't come into effect immediately. We feel that if some lower paid staff are given a 3% increase then we will be forced to give other staff the same 3

increase which makes the situation even worse at a time when we are only just beginning to recover from recession amongst other things.”

A retail store which is a member of Herefordshire and Worcestershire Chamber of Commerce, was clear that changes in business costs would have very little effect on their business, compared to readjusting to new minimum wage increases: “Reductions in corporation tax and the increase in employment allowance don’t even touch the sides for a business employing 300 people like us.”

Greater Manchester Chamber of Commerce, in consultation with their members, calculated that once all policy changes are accounted for, the “relief” policies such as falling corporation tax and increasing employment allowance will not offset increased wage bills in firms that generally employ workers on low pay. For example, a firm with three employees over the age of 25 working just 16 hours a week on minimum wage will see the total price of its labour increase to £6,311.01 a year more in 2020 than it is currently. A 2% fall in corporation tax means a total operating profit of £315,550.50 would offset the increased cost. If those three employees work 40 hours a week the extra cost will be £16,099.14, requiring a profit of £804,957.20 for the relief policies to offset the increased cost. The size of the cost increase relative to the relief only then increases as the number of low-paid employees increase.

The concerning issue highlighted by this calculation is that the majority of the relief will be felt by large, highly profitable firms that traditionally employ few workers on minimum pay, whereas the majority of the cost increase will be felt by small firms or those in particular sectors (such as healthcare) that employ primarily low-paid and/or part-time workers. This creates an uneven distributional impact which sees an increase in costs for firms who will struggle to afford it, and a reduction in costs for businesses who arguably are better placed to shoulder the burden.

Initial reflections on the National Living Wage (NLW): The BCC will fully respond in due course when the LPC consults fully on the NLW. Below are some observations based on initial consultation with our members.

Businesses express concern about the timing of the rates being introduced. Whilst NMW rates are traditionally introduced in October, the NLW is being introduced in April. We recommend the government aligns the timetable for the introductions of all wage rates by introducing the next NLW increase in October 2017 (rather than April 2017). This would also allow firms a longer period of time to adjust to the significant increase due to take effect in April 2016. Firms also express confusion about the term ‘National Living Wage’ and how this relates to the voluntary Living Wage as determined by the Living Wage Foundation.

A cleaning company and South Wales Chamber of Commerce member said: “The impact of increasing the rate in such a short time means that my business has very little time to adjust to increases. The minimum wage will go up by 3% in October and 7.5% in April. This increase in a single year will have massive effect on contracts that are already in place and will mean that they will have to be renegotiated and without any pre-warning that the government intended to do this.

To attain the rate of £9.20 per hour by 2020 that means a 41.5% increase in 5 years that is an average increase of 8.3% per year. Businesses will not be as competitive as the Asia or USA labour markets. Therefore we may well end up with a down turn in the small to medium size companies which are the backbone of the recovery. Leaving more money with those able to find employment, but greater unemployment.”

Most importantly, businesses are concerned about the idea of having a fixed medium term National Living Wage target. Forecasts and suggested rates should be based on evidence and conditions affecting businesses, such as cost for business in fuel and energy, economic performance and confidence, increases in earnings and productivity. Crucially, these conditions can change. It is 4

therefore dangerous to have an inflexible fixed target – this goes against the idea of having an evidence based approach and could have the effect of dampening business confidence.

Finally, businesses are concerned about the projected growth in the differential between the apprentice rate and the National Living Wage rate. Firms will have to carefully consider if they can afford the cost of training and then hiring an apprentice – this may affect the number of apprentices staying in the job after their training. Employers who have recently taken on an older apprentice may struggle to afford to hire them permanently when they have qualified due to the enormous cliff-edge in wage rates that has been created by the introduction of the NLW.

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