The national living wage brings public sector complications

14 Oct 15

Introduction of the national living wage is a welcome development. But it raises some big questions about the feasibility and fairness of pay restraint in the public sector.

Since its announcement at the summer Budget, the National Living Wage (NLW) has rarely been out of the headlines. We’ve heard employer warnings on its impacts as well as some firms going one better and bumping their staff up to the ‘real’ Living Wage. But what’s received less media attention is how the public sector will be affected.

Looking at the overall impact, things don’t initially appear too concerning for the generally higher-paying public sector. Analysis by the Resolution Foundation assumes that it won’t just be workers paid below the new legal minimum (£7.20 from next April, expected to rise to over £9 by 2020) who gain from the higher wage floor. Workers paid at or slightly above that level can also expect to benefit as employers choose to maintain some pay gaps between different roles.

Altogether, an estimated 27% of workers in the private sector are expected to see some wage uplift by 2020, compared to 20% in local authorities and just 8% in central government. That’s projected to result in a wage bill increase (not including additional employer NI or pension contributions) of 0.8% across the private sector, 0.3% in local authorities and 0.1% in central government.

But these figures need to be considered in the context of the pay restraint set out for the public sector at the summer Budget. The 1% cap on wage bills for four years from 2016/17 will also have to cover pay increases from the NLW. Coming on top of the squeeze local government budgets have been placed under since 2010, this all means implementing the NLW will be a more challenging proposition than a first glance would suggest.

What options are available to decision-makers on pay in the public sector to handle this additional cost? Public sector employment is expected to fall over the coming years which could provide extra headroom to manage the NLW. But how exactly those job losses are coped with across different services will be crucial, with the risk being that the current level or quality of service provision is unsustainable.

Raising productivity may be another way of handling the added costs, and much thought has been given to how the public sector can work more efficiently. But while this is certainly an important aim, whether any such gains will be sizeable enough to tackle the challenge of a rapidly rising wage floor at a time of pay restraint (especially when private sector pay is rising) is dubious.

A more likely option is giving lower pay increases to better-paid staff. It may mean that a smaller number of employees gain from the ripple effect than in private firms. That would reduce the estimated cost but lead to greater compression at the bottom of the pay ladder, as well as raising difficult questions around recruitment and progression with potential knock-on effects on the quality of the service provided.

One particular pinch point is expected to be social care. Having been regarded as an underfunded low-pay blackspot for years, the size of the problem there is only set to worsen. With some staff already not receiving the legal minimum, and pressure on the length of visits and the quality of care provided, the sector is a case in point of the potential difficulties the NLW could raise for essential services if no additional funding is allocated.

The NLW is a welcome move that represents a major intervention on low pay. But because it’s such a bold step, the government must go beyond simply announcing the policy and outline a plan for implementation. In isolation, the NLW’s impact on the public sector is limited. But given the wider context in which it takes place, it exacerbates existing concerns around both the fairness and feasibility of pay restraint.

The government needs to recognise its role as an employer and ensure it meets its own commitments while paying close attention to the impact on public services. And as a funder of services, it must consider whether the current state of affairs is sustainable and weigh the case for greater investment. Without such a plan, it may be that the public sector starts to attract more headlines, for all the wrong reasons.

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