National Living Wage set to increase: how does this affect business outcomes?

National Living Wage set to increase: how does this affect business outcomes?

The Low Pay Commission (LPC) has published its recommendations for the National Living Wage (NLW) for next year. The headline figure is to increase by 19p to £8.91.

In giving their recommendations the LPC has considered a number of factors including the target it was set by the UK Government (for minimum wages equal to two thirds of median earnings by 2024) but also crucially the state of the economy in this highly uncertain world.

Frontier carried out significant work during the last year which has featured in the LPC’s report. Specifically, we examined how the NLW has affected business outcomes including productivity and employment by linking the Annual Survey of Hours and Earnings (ASHE) data set to the Business Structure Database (BSD). We identified businesses that were observed to pay below the incoming NLW and compared outcomes with similar employers who were observed to pay more than 20 per cent above the incoming NLW.

We found that employment growth from 2015 to 2018 was 2-3 per cent lower in workplaces that were more affected by the NLW while survival rates (the proportion of business units that continue to operate) were found to be between two percentage points higher for firms more exposed to the NLW, with the effects concentrated in the retail and food and drink sectors. We conducted a range of robustness tests which concluded that the reductions in employment observed in the data are unlikely to be due to the introduction of the NLW specifically, but may reflect wider trends over the period. For example, we observe various forms of capital-labour substitution, such as self-scan checkout and computerised ordering systems in supermarkets.

We regularly advise private and public bodies on labour market issues including minimum wages. More information on all of the research commissioned by the Low Pay Commission this year is available here.

For further information please contact or call +44 (0) 20 7031 7000.