Higher pay is an opportunity, not a cost

According to a major group of employers, the introduction of the ‘national living wage’ on Friday created a ‘burning platform’ for businesses. Invoking the language of the organisational change guru Darryl Conner, the claim implies businesses are facing a choice between certain death and probable death – as the rise in the wage floor piles on to costs created by the apprenticeship levy and other government policies.

Should they remain on the burning oil rig, or dive into the icy oceans below? It’s not a choice I’d like to make, but then I don’t think this is really the choice businesses are facing either.

The real choice is about how employers view the introduction of the national living wage: is it simply a cost, or an opportunity to do things differently?

At 50p higher than the current national minimum wage, there’s no doubting this is a major rise for millions of workers. And as the rate rises to £9 by 2020 – 60 per cent of the average wage – it will be a challenge for many employers, particularly in the traditionally low-paying retail, hospitality and social care industries.

But reports of the death of large swathes of the UK’s labour market have been greatly exaggerated. Whether it’s the claim that the national living wage and other policies will cost a million jobs, or that a quarter of all workers will have their pay set at the national living wage by 2020, these forecasts overlook the capacity for creativity amongst Britain’s employers.

Just look at how wrong the forecasts got it in the 1990s. Before the introduction of the national minimum wage, Michael Howard claimed it would cost up to 2 million jobs. It cost none. Howard’s prediction has gone down in history as one of the great political misjudgements, but it wasn’t just the former home secretary who got it wrong. Until a group of innovative academics challenged the theory that minimum wages would create unemployment in the early 1990s, it was widespread amongst economists.

The problem with these forecasts was that they predicted a future that reflected the past. But that’s not how the economy works in practice, nor indeed, how the future works.  Alan Manning, professor of economics at the LSE and one of the innovative economists who pioneered the national minimum wage, told the Financial Times, “we’ve always been surprised about how you seem to be able to push [minimum wages] up without harming job prospects.” Importantly, he implies current forecasts are no more likely to be accurate, saying “we just don’t quite know where” the point is at which “serious adverse effects” will kick in.

This is because it is not as simple as cause and effect. The introduction of the national living wage gives employers a choice: treat it as a cost and reduce employment levels or other parts of the reward package to break even; or see it as an opportunity to invest in the workforce and look again at how to change management practices, because higher pay, higher productivity and higher profits can go hand in hand.

There are already a number of examples of employers seeing the reform as an opportunity to innovate. Ikea are giving staff greater training in technology to boost productivity, Pets at Home are adding flexibility to their senior roles, and Oliver Bonas are increasing pay beyond the statutory minimum to reduce turnover. And research published this week by John Van Reenan and David Card shows that these sorts of managerial innovations are boosting productivity, allowing firms to recruit better people, and adding to their bottom lines.

But let’s not let a few shining lights blind us from the bigger picture. The truth is that too few employers are choosing to view this as an opportunity, and too many are cutting back on employee benefits or threatening to reduce the number of jobs on offer.

It’s a choice. A choice between investing in the workforce and cutting it back.

And that’s precisely why it’s not a burning platform in the Darryl Connor sense. Because the choice faced by the oil rig worker in Connor’s metaphor was one between certain death by remaining on the burning platform, or probable death by jumping into the ocean. But with the introduction of the National Living Wage, innovative employers are showing there’s a viable route to shore. Investing in people to boost productivity is not a leap into the unknown.