Pay· Minimum wage When it comes to the ‘National Living Wage’ being introduced to the world, it’s time for some responsible parenting 15 September 2015 by Torsten Bell Torsten Bell The Chancellor’s introduction of a higher minimum wage – the ‘National Living Wage’ – is a policy with competitive claims to its parentage. Announced by a Government, advocated by the official opposition, and prefigured by work from a range of experts including the Resolution Foundation. From all these and more it’s now time for some more responsible parenting to ensure this policy’s entry into the world is as successful as possible. Today the Resolution Foundation is playing its part – setting out the parameters of an implementation plan in a new report. This is by far the biggest change we are likely to see in the UK labour market over the next five years. Despite the “Living Wage” title, what the Chancellor has really announced is a plan to adopt one of the highest minimum wages in the developed world, in a country with amongst the lowest productivity. This is the right thing to do – but it isn’t an automatic success. Our starting point should be humility about what we do and do not know – those asserting that it will certainly cost jobs and those arguing that there are no risks to consider are equally wrong. Instead we should welcome the boldness of the policy if not its coupling with damaging tax credit reductions, and its potential to change Britain’s place near the top of the low pay league table. But we should be open about the challenges it poses, take steps to address them and monitor its impact. Let’s start with some facts. The Chancellor’s plan is for the minimum wage for the over 25s to rise to £9 by 2020. Crucially the policy links this minimum wage to 60% of the wages of the typical over-25 worker (the median wage). This is big news, with not only a welcome pay rise for 6 million Britons but the establishment of the principle that the minimum wage will keep pace with rises in wages for the rest of the population. But that pay rise has to come from somewhere – it stands to add a £4.5bn pressure to the wage bill of UK firms by 2020. That sounds a lot, but there are reasons for optimism. For the overwhelming majority of sectors this will be more than manageable – the cost will be significantly less than 1% of the wage bill in most sectors. And the evidence of the first decade and a half of the minimum wage is that firms faced with higher wage costs have responded by changing how they do things and driving up productivity rather than simply cutting jobs or raising prices. But, as today’s report shows, that optimism should be matched by a recognition that in some parts of our economy the National Living Wage will have real bite. Those areas should be the focus of any implementation plan because they are where firms will make big choices about whether to adjust via a productivity drive (desirable), lower employment (undesirable), reduced wage growth for other staff, smaller profits, higher prices or a combination of these. Almost half (46%) of those that will benefit from higher wages work in just three high employment sectors: retail, hospitality and support services (principally cleaning). Indeed in hospitality the wage bill increase is set to be 3.4% by 2020. How can an implementation plan make headway with these issues? Firstly it should be a wake up call for the debate on productivity to pay more attention to who is doing the producing. There is certainly room for improvement here. In the Government’s recently launched ‘Productivity Plan’, amongst nearly 30,000 words and many useful policies, there is no mention of hospitality or cleaning. There is a mention of the retail sector but simply to note that productivity growth has slowed. These sectors might not produce the next Google – but they are the sectors where the National Living Wage will require new, more productive, ways of doing things. Ignoring them is not an option. Similarly more focus is needed on small firms and geographical pinch points. The smallest firms, employing less than ten workers, will face the biggest impact on average. Their wage bill will rise 1.5% by 2020, compared to less than half that in firms employing more than 250 people. Twice as many workers are low paid in the North West as are in London. Secondly we need to update our institutions to reflect the urgency of the task. The Low Pay Commission has been a major institutional success over the past fifteen years. Some argue that the Chancellor’s announcement has put that at risk. Instead it can be the trigger for a new stage in its development with the LPC at the heart of an implementation plan. It should be empowered to identify both the pinch points and develop solutions that would boost productivity to overcome these roadblocks. And the government should clarify that the LPC will retain the ability to monitor overall implementation, if necessary recommending changes to the path of wage rises to ensure employment is not undermined. Thirdly, although the public sector is relatively lightly affected, government will need to lead a fairly profound process of change in social care. The sector is now so dependent on low paid labour that change is inevitable if the higher minimum wage isn’t going to simply lead to a further rationing of already underprovided care. The signs aren’t good – social care is actually the only area of public sector productivity that is falling. Having brought the National Living Wage into this world the Chancellor has set the country the right exam question – to implement it successfully. We know we’ll be sitting that exam between today and 2020. Responsible parenting is about doing everything we can as a country to pass. This blog first appeared on the Huffington Post.