National living wage rise to at least £11 provides ‘nice balance’ between firms’ affordability and employee need, say experts

Commentators admit employers are already upping wages and benefits packages to compete in the labour market, so should be able to absorb the minimum 58p increase to the NLW

Credit: Thierry Monasse, VICTOR-DigitalVision Vectors/Getty Images

The national living wage (NLW) will increase to “at least £11” an hour from April next year, chancellor Jeremy Hunt announced at the Conservative Party conference in Manchester today (2 October).

The NLW, which establishes the lowest amount of money workers who are 23 and over can legally be paid per hour, currently stands at £10.42, but the new rate will mark a percentage increase of 5.5 per cent per hour. 

In his speech to conference delegates, Hunt said: “We promised in our manifesto to raise the national living wage to two thirds of median income – ending low pay in this country.”

And while the government waits for the Low Pay Commission’s recommendation for next year, “whatever that recommendation, we will increase it next year to at least £11 an hour”, he added. “A pay rise for over two million workers. The wages of the lowest paid over £9,000 a year higher than they were in 2010.” 

The news comes as UK inflation hit a high of 11.1 per cent last October. In August, the CPI stood at 6.3 per cent, still some way off the government’s target for inflation to fall to 2 per cent. 

Duncan Brown, principal associate at the Institute for Economic Studies (IES), said the IES was “very supportive of this policy of phasing the progression of the NLW up to two thirds of average earnings”.

“High inflation has hammered the living standards especially of the lowest paid and so the phased progress in recent years has struck a nice balance in our view between employer affordability and employee need, at a time of real wage cuts and growing in-work poverty.”

Meanwhile, Tony Wilson, IES director, suggested that the rise was actually below average growth in regular pay, which has been closer to 8 per cent for most of this year, so many firms would have already “priced in” the upcoming rise. “We’ve had larger increases than this over the last few years (except for during the depths of the pandemic) and so far there’s very little evidence that this has led to any negative impacts on employment,” he told People Management.

Charles Cotton, pay and reward adviser at the CIPD, said while the rise may impact the wage bill of companies in lower-paying sectors, such as hospitality and retail, many organisations were already taking action to address talent shortages. “While many firms are struggling financially, the CIPD’s most recent Labour Market Outlook finds many are also struggling to fill job vacancies. To recruit and retain employees, businesses are already having to up their wages rates, such as through pay rises or counter offers,” he said. 

“During the worst cost of living crisis in decades, many employees are looking for higher wages, either with their existing employer, or a new one. Those organisations that can’t increase pay will be at a disadvantage in the labour market, unless they can improve other aspects of their package instead, such as employee benefits or flexible working.” 

Living Wage Foundation director Katherine Chapman welcomed the news of the NLW increase, but said it “may fall short of the real living wage next year, the only rate that is independently calculated based on the cost of living”.

The real living wage – which employers voluntarily sign up to rather than being mandatory – for outside London stands at £10.90 per hour, while for London it is £11.95. 

Chapman said she expected “a significant increase” in the real living wage, which is due to be announced on 24 October.

For organisations preparing for a predicted dramatic rise in wage bills, Cotton advised HR teams to “explore the organisation’s current employment and business model to see how labour productivity can be improved”. 

He used the examples of automating tasks previously done by people, investing more in machinery, equipment or technology and increasing the provision of training to low-paid or other workers. “If productivity can be improved, then companies will be more able to absorb this extra labour cost,” Cotton said.