Counting the costs of a living wage

published 2 April 2016

16-4-1-Pepper-634 — Get used to seeing more robots around

In the unlikely event that any MoneyWeek readers are among the lowest earners in the UK, then today you are getting a pay rise. On1 April the national living wage cameinto force, after being unveiled in the Budget last year. Anyone over 25 will have to be paid at least £7.20 an hour, with the rate projected to rise to £9 an hour by 2020. With inflation close to zero, that's a chunky rise anyone on the existing minimum of £6.70 per hour will see their pay rise by 7.5%.

It's one of the largest state interventions in the market seen in the UK, certainly in the setting of wages even more so than 1997's introduction of the minimum wage, which was set close to what the lowest earners were already getting. In the short run, it could mean slightly lower corporate profits, and a rise in unemployment, as low-earning staff become more expensive. But the long-term consequences will be far more interesting. Here are five trends we can expect to gather force.

1. More automation

Huge advances are being made in robotics, but there's no incentive to invest in robots when people can do the work for less. However, as the cost of labour rises, automation will become more cost-effective. No matter how infuriating you find them, expect a lot more pay-at-the-pump petrol stations and self-service tills.

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2. Expect immigration to fall

The existence of large numbers of low-paid jobs was one key reason for so many people especially those from eastern Europe coming to the UK. The wages weren't great, but they were a lot higher than in Bulgaria. But those jobs won't exist any more (certainly not in those quantities) and, as a result, people won't be so keen to move here. We might hear a lot in 2018 about how the benefits cap has lowered immigration but the real culprit will be the living wage.

3. Productivity will finally rise again

Our record on boosting output per worker has been dismal over the last few decades. But that's partly because labour has been so cheap that there has not been much incentive to invest in capital. The maths of that will start tochange. Meanwhile, those with the least valuable skills will be unable to secure work. The net result? The productivity of those in work will start to rise we may become more like France, where productivity is high, but unemployment is too.

4. Our trade deficit will get even worse

Fourthly, our trade deficit already high at more than 5% of GDP will get even worse. Lots of low-skilled manufacturing will no longer be viable with higher wages. A lot of that sort of work will move to cheaper countries, mainly in eastern Europe. We will import that stuff instead, making an already terrible trade deficit far worse.

5. Many shops will close down

Retailers have the highest concentration of poorly paid staff of any industry, and now face a steep rise in labour costs. Even if spending rises modestly to offset it, higher wages will be the last straw for many shops, especially smaller ones. Expect a huge round of closures and we will have to think seriously about what to do with all that redundant retail space.

None of this is to say that a living wage is a bad idea. Our economy has become far too reliant on cheap labour. The interaction between the tax credit system and the labour market meant we were effectively subsiding low-paid work on a vast scale. A high-skill, high-wage economy is what everyone wants. The living wage may shift us towards that, but it will also change some things for the worse. If you reset the price of something as critical as labour, it feeds into the economy in unexpected ways. We can only guess what those will be.

Matthew Lynn is a columnist for Bloomberg, and writes weekly commentary syndicated in papers such as the Daily Telegraph, Die Welt, the Sydney Morning Herald, the South China Morning Post and the Miami Herald. He is also an associate editor of Spectator Business, and a regular contributor to The Spectator. Before that, he worked for the business section of the Sunday Times for ten years.

He has written books on finance and financial topics, including Bust: Greece, The Euro and The Sovereign Debt Crisis and The Long Depression: The Slump of 2008 to 2031. Matthew is also the author of the Death Force series of military thrillers and the founder of Lume Books, an independent publisher.