Get ready to pay the living wage

The big surprise of the 2015 Budget was when George Osborne said everyone would receive the living wage. The process begins in April 2016 and businesses are coming to terms with the potential impact on their profitability. The boss of Costa Coffee said it would increase prices to cover the higher wage, confirming how inflationary this will be for the economy. But with inflation below the 2% target and set to remain there, the Government can risk the inflation the living wage will bring – the gamble being that putting more money in people’s pockets will encourage spending.

It’s easy for Costa to say it will raise prices, and no doubt the rest of that industry will do the same, but farmers and farm businesses are in a different position, in that they can’t simply pass on higher costs.

The wage rise is in stages with the new level for anyone over 25 being £7.20/hour in April 2016, against a minimum wage now of £6.50. This will rise in stages to £9 by 2020. For small businesses it will be partly offset by a change to National Insurance regulations, and for bigger businesses by a reduction in the corporation tax rate. But most businesses see this as more of a threat than an opportunity, particularly if they can’t pass on higher costs.

Farmers are probably in the worst position. Take a labour-intensive operation, such as vegetables or fruit, producing for supermarkets. Their wage bill is a challenge, given pressure on margins, and it will rise under the new rules. In the face of those higher costs they will be urging supermarkets to pay more, but they too are unhappy that at a time of squeezed profits their wage bill will rise, so margins pressure is likely to become more, rather than less intense.

Anyone now over the age of 25 and working 35 hours a week will see their income rise by a third by 2020. If you’re their employer you’ll be paying that increase from, in the case of farming, already slim profits. It does, however, only apply to people over 25, so if you’ve a young workforce they’ll only be entitled to the minimum wage. You can then use a bonus system to encourage productivity. Using part-timers or short-term contracts may save on other costs, but since the living wage is based on a per hour figure it applies regardless of whether someone works one or seven days a week and whether they’re part-time of full-time.

In these circumstances the options are to reduce profits, increase prices, or get more out of your workforce. This may involve mechanisation, but there’s a productivity deficit in the UK, compared with other countries, that can be filled to get more output for the higher wages. This will be about managing people better, not just telling them to work harder because they’re being paid more. It also incentivises employers to employ younger people on short-term contracts.

The Government says the living wage will leave 6m people better off through higher wages, but will cost 60,000 jobs. The CLA has warned that rural businesses, with less scope to pass on higher costs, are likely to be worst hit.

With any price increase it’s better to do it in stages. Begin planning now to raise prices if you have a diversification business. Even if your wages are contained the general increase in prices from the living wage creates conditions for you to do so. As for the supermarkets and supply contracts, that’s going to be a difficult conversation with people never in the mood to discuss price rises, and who in fact want to see even lower prices to rebuild their shattered balance sheets.

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