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18 September 2015

Lidl’s move shows that even in low-margin sectors, higher pay is possible

Lidl's adoption of the real living wage is excellent news, says the Resolution Foundation's Conor D'Arcy. 

By Conor D'Arcy

The past few months have seen some big wins for low-paid workers. This morning’s welcome announcement that Lidl will pay all their staff the Living Wage comes soon after IKEA pledged to do the same and the Chancellor’s major announcement in the Summer Budget of the ‘National Living Wage’. But as well as these positive steps, we’ve heard concern from employers, with some stating that price rises or job losses will be inevitable if they have to pay a higher wage. How does it all fit together?

As encouraging as the Government’s National Living Wage is – it will bring the legal wage floor for eligible workers to £7.20 from April next year – it’s confused things terminologically. The National Living Wage is in fact a supplement to the National Minimum Wage for workers aged 25 and over. That’s because it’s compulsory and applies to everyone in that age bracket. The Living Wage on the other hand is voluntary. It’s calculated based on public perceptions of what’s needed to reach a minimum acceptable standard of living. Because of that, and unlike the national minimum Wage, the Living Wage (£9.15 in London, £7.85 in the rest of the country) is not based on whether employers will be able to afford it. It’s up to firms themselves to decide whether they want to sign up.

Lidl’s move shows us two things. First, it highlights the ongoing relevance of the Living Wage campaign and movement. The ‘borrowing’ of its moniker by the government presents some problems for the Living Wage brand, but today’s news shows its continuing value to companies. Second, it breaks us out of some of the more negative reactions emanating from employers of late. Giving their staff this pay rise won’t come for free, but Lidl clearly thinks it makes good business sense to do things differently by paying this higher rate to their staff.

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But does Lidl’s positive step on the actual Living Wage mean we can dismiss all concerns about the impact of the higher minimum wage (‘National Living Wage’)? A report published this week by the Resolution Foundation suggests that for the majority of employers in most sectors, the new higher wage floor should be affordable. But as the National Living Wage rises over this parliament – the government’s ambition is for it to exceed £9 by 2020 – the analysis highlights that it will prove more challenging for certain industries. Retail is among those, with an estimated 46 per cent of employees set to gain by 2020, meaning an average wage bill increase of 2 per cent for employers. And we have seen warnings from employers of what that impact will mean in terms of lost jobs.

Many of the same fears were aired when the National Minimum Wage was introduced back in 1999. But what we’ve learned over the intervening 16 years is that employers are adaptable. Using a combination of approaches – boosting the productivity of their staff, reducing pay gaps between employees, lowering profits and small price increases– firms have found a way to afford higher wages.

This provides grounds for optimism but doesn’t mean we can assume there are no challenges with the impact of the National Living Wage – these wage bill increases have to come from somewhere. Part of the reason for the National Minimum Wage’s success has been the careful stewardship of the Low Pay Commission, the body tasked with recommending what rate is affordable. Their role has been muddied somewhat by National Living Wage. It is precisely because the National Living Wage is a step into uncharted territory, with bigger increases than we’ve seen before, that it’s so important that the Low Pay Commission retains its place at the heart of the UK’s minimum wage infrastructure.

Lidl’s welcome announcement shows that, even in low-paying sectors like supermarkets, employers can do things differently on pay. To make the National Living Wage a success over the next five years we’ll need to see a broader embrace of different approaches and business models, alongside a proper plan for its implementation. That plan needs to flag and deal with problems before they arrive, especially in the most-exposed sectors like retail. That way, they’ll ensure that all those set to gain from the National Living Wage really do so.