Lidl shows that a living wage isn't an act of charity - but a sensible strategy

Lidl has felt the benefits of increasing its staff's wages - suggesting that a wage increase may not be the blow businesses fear it could be.

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The annual announcement of the new Living Wage rates (£8.25 nationally; £9.40 in London) on Monday follows a busy few months of debate on so-called “living wages”. The Chancellor kicked things off at the summer budget by announcing a new minimum wage rate for over 25s; to the chagrin of many Living Wage campaigners he called it the “National Living Wage” even though, at £7.20 per hour, it will be much lower than the Living Wage, which is independently determined by the Living Wage Foundation.

The head of the Confederation of British Industry (CBI), John Cridland, has entered the debate calling Osborne’s minimum wage hike a “gamble”. He joins several business leaders, including the chief executive of Next, who have raised concerns about the new higher minimum wage. They claim that the new hourly rate may be too expensive for some businesses, forcing them to make unsavoury choices, such as reducing the number of jobs available, or passing the costs through to consumers in the form of higher prices. Work by the Office for Budget Responsibility suggests there is substance to these objections: it estimates that 60,000 jobs could be lost by 2020 as a direct result of the policy.

But price rises and job losses aren’t inevitable. If workers’ output per hour – or productivity – were to increase, then in a context of rising demand, employers would be able to afford higher wages without putting up prices or shedding staff. Since the outlook for UK demand and job creation is favourable, now is a good time for businesses to implement a higher-productivity, higher-wage business model.  

The sectors set to be most affected by the introduction of the National Living Wage next April – retail, accommodation, food, cleaning and care services – have significant scope to boost the productivity of their workforces. Forthcoming analysis from IPPR shows that the UK’s low-wage sectors are much less productive than their counterparts in Germany, France, the Netherlands, Belgium and Sweden. If we were to raise the productivity of our low-wage sectors to the level seen on average across these countries, wages could rise by as much as two pounds an hour and remain affordable.

Although the low-wage sectors tend to be less productive on average, there are good examples of individual businesses within these sectors that achieve higher productivity, not least those which manage to pay the Living Wage. Among the 2000 British businesses that have signed up to the Living Wage are retailers Oliver Bonas and Lidl: the first supermarket to commit to paying its workers the Living Wage.

Lidl, a budget supermarket, is able to make this commitment because it is already productive enough to afford higher wage costs. More than likely Lidl recognises too that better wages make for more engaged employees, which in time will boost productivity further. Although its business model is less labour-intensive than other supermarkets, Lidl has nevertheless expanded its workforce as shopper demand has grown.

For some businesses, in particular SMEs, it may be a struggle to implement George Osborne’s higher minimum wage, let alone the Living Wage. But businesses achieving higher productivity in other countries, and the Living Wage-accredited employers in low-wage sectors here, provide examples for businesses faced with a rising wage bill. Who knows - if they’re as successful as Lidl, they may even be able to surpass the legal minimum and become Living Wage employers too.

Izzy Hatfield is Research Fellow at IPPR