Earlier this month, United Kingdom Chancellor George Osbourne declared that there would be a new legal living wage of £7.20 per hour. Employers are required to pay this amount starting in April of 2016 to employees aged 25 or older, and this rate is expected to rise to £9 per hour by 2020. The existing minimum wage for those over 21 is £6.50 an hour. Although the U.K. government predicts that around 2.7 million low wage workers could benefit from the change, many organizations and citizens throughout the country are fiercely opposing the soon-to-be implemented measure.
According to the Association of Convenience Stores (ACS), the introduction of a national living wage could cost the convenience sector alone £166 million. The association called the action a “reckless measure” and believes that once executed could lead to retailers having to reduce staff hours and cancel investment plans. An estimated 24,000 stores could close down, leading to 80,000 jobs being lost according to the ACS.
Since the wage only applies to those 25 and older, younger employees will continue to be paid at the current lower minimum wage rate, even though they will be the hardest hit by the cuts. In addition, Osbourne also announced that there would be big cuts to benefits, including a freeze on tax credits for four years and a lowering of the level at which they are reduced. This itself could result in any gains from the wage increase being completely eliminated. For example, a couple both working full time on minimum wage would gain £1,560 from the new living wage, but would lose £2,000 from the changes to tax credits, resulting in a net loss.
The Office for Budget Responsibility (OBR) has estimated that the rate will cost the U.K. 60,000 jobs by the end of this parliament’s term, and the move could also cost 1% in business profits. Osbourne is hoping to offset the negative economic impacts of the plan by cutting corporation taxes to 18% and hiking the Employment Allowance to £3,000 for small firms. Still, the ACS believes that the national insurance contribution relief would provide comparatively small compensation for the convenience stores affected by the new living wage.
Swedish furniture firm Ikea will become the first national retailer in the U.K. to pay its staff more than the government set wage. Ikea announced that beginning in April 2016, it would begin to pay all its 9,000 U.K. workers at least £7.85 per hour (£9.15 in London). The firm estimates that over half of its workers will benefit from the change. Still, even though its U.K. sales rose 12% to £1.46bn in the 12 months to August 2014, pre-tax profits fell £5m to £41.8m. If the OBR is correct in its estimates of overall profit loss for the country, this could also negatively impact Ikea. Do you think that instituting the national living wage will benefit those in need of higher wages, or harm U.K. workers as a whole? Comment below and let us know what you think!