For the past couple of months, many minimum-wage workers have enjoyed a little extra in their pay cheques. It was hoped that the government’s National Living Wage, introduced on 1 April 2016 at the rate of £7.20 an hour for workers 25 and older, would reduce the government’s £30 billion bill for working tax credits and end the subsidising of suppressed wages. It is too early to tell what the overall economic impact of the change will be, but evidence suggests that gloomy predictions about the negative effect on retail have some basis.

The big picture

The retail sector employs more than three hundred thousand workers in the UK, a large proportion of which have fewer skills and earn the minimum wage. By comparison, because many hospitality sector workers already earn more than £7.20 per hour, the increase will not be felt so sharply. Critics have claimed, therefore, that although the Living Wage may be affordable for the economy as a whole, those running the balance sheets of retail companies – and, crucially, their customer-facing employees – bear the brunt of the repercussions.

In the workplace

The cost of implementing the new threshold has been higher than the government anticipated because many retailers have opted to expand the wage increase to include 18–24-year-olds. Employers have also sought to maintain previous pay differentials between staff, offering pay increases to more experienced staff who were earning more than their minimum-wage colleagues.

Despite their efforts to implement the Living Wage fairly, certain retailers have been forced to cut costs in other areas. B&Q became the subject of an online petition when it tried to reduce costs elsewhere by cutting Sunday pay, ending paid breaks and reducing overtime. Ultimately the DIY powerhouse was obliged to review its decision but defended itself, arguing the new pay deal included all staff, not just those over 25.

Job losses

Conservative backbencher David Davis, now Secretary of State for exiting the European Union, expressed concerns the new minimum would accelerate the adoption of automation and in turn lead to further job losses. Representatives of smaller independent stores argue that absorbing higher costs will not always be workable and will force them to reduce staff numbers and operating hours. The Centre for Retail Research estimated that the National Living Wage would result in full-time-equivalent job losses of 42,000.

Looking ahead

The government is targeting £9 per hour by 2020, and the retail sector needs to be ready to bear the lion’s share of the burden. Offsetting the cost by cutting staff conditions is an unlikely long-term solution as firms risk provoking ire amongst consumers and increased churn in their workforce. Instead retailers should look for ways to improve working conditions to maximise the output they get from each no-longer-so-cheap employee.