Apr 04 2018
The introduction and subsequent rises in the National Minimum Wage and the National Living Wage have affected the cost structures of numerous industries reliant on low-skilled labour. In this report, IBISWorld analyst Frances Luery assesses five industries likely to face significant pressure from the most recent rise.
In April 2016 the UK government introduced the new National Living Wage (NLW), which entitled non-apprentices aged 25 and over to a minimum wage of £7.20 an hour. This represented an increase of 50p on the National Minimum Wage for those aged 21 and over at the time. The NLW was increased to £7.50 the following year and is set to increase again to £7.83 in April 2018.
The government aims to increase the rate to 60% of median hourly earnings for workers aged 25+ by 2020, which in 2016 was projected to be well over £9. However, downgrades to forecasts suggest the national living wage will be closer to £8.20 by the end of the decade.
At the time the NLW was introduced, many industries voiced concerns over the effects the 7.5% pay-rise would have on their cost structures. In particular, low skilled, labour intensive industries, with limited scope for automation were vulnerable to the higher minimum wage.
IBISWorld has identified five key industries that have been affected by the higher rate and which remain vulnerable to future increases.
As hotels are service-orientated, wage expenses are a significant cost burden for enterprises, accounting for an estimated 29.1% of industry revenue in 2017-18. Of the nearly 390,000 employed in the UK industry, a high proportion are paid at the minimum wage. Low-paying jobs in this industry include housekeeping, receptionists and kitchen staff, with the average wage estimated to be just over £14,000 in 2017-18, which is henceforth to be referred to as the current year.
Both full-service and takeaway restaurant operators face substantial wage expenses. For the industry as a whole, labour costs are estimated to represent nearly a third of sales revenue. Labour is essential for front-of-house, food preparation and cleaning activities, particularly for establishments with table service. The average wage for the collective restaurant industry is estimated to be just under £11,000.
Some industry operators have been able to overcome the higher rate through investment in capital. Automated ordering screens are now commonplace in larger fast-food chains like McDonalds. However, small and service-focused restaurants are less able to adjust to the higher rate.
The General Building Cleaning industry is highly labour intensive, with labour costs accounting for an estimated 61.6% of industry revenue in 2017-18. The low level of skill required for cleaning services means that the average industry wage is estimated to be below £10,000 in the current year, though nearly two-thirds of industry workers are employed on a part-time basis. Preserving already tight margins within the industry relies on operators being able to pass on cost increases to clients.
Operators across the social care sector as a whole face the challenge of passing on wage cost increases when the primary source of revenue is the public sector. The most affected services are nursing homes and social services for the elderly and people with disabilities. In most social care industries, labour costs account for between 50% and 70% of industry revenue. While skilled employees like nurses and other medical specialists are essential to these industries, many workers are employed in low-skilled, low wage tasks, such as carers, cleaning and kitchen staff. Budget cuts to public services have significantly limited the funds available for social services in recent years. From 2017, local authorities were given power to increase council tax by an extra 3% to cover social care provision. However, according to the Local Government Association the estimated £543 million that local authorities raised from higher council tax will be dwarfed by the £600 million in additional costs incurred by the National Living Wage.
Wage costs in the Fruit Growing industry are much higher than the average for the agricultural sector, estimated to account for 37.4% of industry revenue in 2017-18. The fragility of industry produce and the specific quality requirements of major retailers mean that many fruits are picked by hand to avoid bruising and damaging produce. Many small farms in the industry operate at a slim margin as supermarket price wars prevent producers from passing on cost increases.
For a printable PDF of Change and challenge: The National Living Wage, click here.
IBISWorld industry reports used in this spotlight report:
A01.200 - Fruit Growing in the UK
I56.101 - Full-Service Restaurants in the UK
I56.104 - Takeaway & Fast-Food Restaurants in the UK
N81.210 - General Building Cleaning in the UK
Q - Human Health and Social Work Activities