In July the Government announced that the National Living Wage will be here from April 2016. For workers aged 25 and over who currently earn the National Minimum Wage (NMW), this means a wage increase from £6.70 to £7.20 an hour. In the short-term, this involves a pay rise for six million workers and the Government has set a target of increasing the National Living Wage to £9 an hour by 2020.

The hospitality sector is the largest low-paying sector in the UK. According to the Low Pay Commission, one in four jobs paid at the current NMW can be found in hospitality and within the sector itself, one in four employees are paid the NMW. Therefore, hospitality businesses are going to be affected by the National Living Wage more than anyone. But is paying the National Living Wage a positive step for businesses?

The first question to ask is, why do we need a National Living Wage when we already have the NMW? With the current NMW rate for workers aged 21 plus at £6.70, NMW rates can create working poverty, particularly in London, and the gap between the richest and poorest in society is getting ever wider. Therefore, few would argue that staff should not be paid enough to afford a minimum acceptable standard of living.

Whilst the economic effect of the National Living Wage has not yet been tested, paying a living wage has clear commercial benefits. Studies have shown that paying a living wage can improve performance, reduce absenteeism and the number of disciplinary hearings. Better-paid employees often have improved morale and well-being which is likely to deliver better service to customers and guests and improved productivity. Hopefully, the National Living Wage will have a similar effect. For businesses willing to pay over and above the National Living Wage (Lidl being a recent notable example), this can also create business opportunities with customers and guests more willing that ever to support ethical brands. Paying the Living Wage Foundation Living Wage (£7.85 outside London and £9.15 in London) has become mandatory as part of some procurement processes.

Clearly, there are potential downsides to the National Living Wage. The additional cost of the National Living Wage (including increased NICs and pension contributions) could have a counter-intuitive effect on employment:

For those thinking about recruiting, the additional cost of staff will inevitably make them think twice and may stem the creation of additional jobs. The Guardian has reported that some employers already fear the worst and have imposed a recruitment freeze and a ban on overtime.

For businesses unable to absorb the increase in wages, job losses are unfortunately foreseeable.

The Office for Budget Responsibility has estimated that 60,000 jobs will be lost as a result of the implementation of the Government’s National Living Wage plans. The majority of these jobs are likely to be lost in those geographical areas where unemployment is already at its highest. Therefore, whilst the apparent aim of the National Living Wage is to reduce economic inequality, the danger is that the initiative could have the reverse effect.

With a squeeze on recruitment, it is likely that more will be demanded from those in employment which will lead to increased demands on their time, increased levels of stress and, consequently, increased levels of absence in the workplace.

So, to summarise, nobody is yet sure what effect the implementation of the National Living Wage will have on the hospitality sector. However, the EY Item Club has said that “ultimately, the success or otherwise of the [National Living Wage] depends upon how the business community responds."