5 May 2016 | Graeme Davies
The national living wage (NLW) may only be a few weeks old, but already thoughts are turning to the possible longer-term consequences of the uptick in pay for the lowest earners.
Over the coming months we will discover whether the prophets of doom who predicted that companies' profitability will be hit by the millions in extra costs were right and if the warnings from companies as diverse as FM provider Interserve to retailer Next and hospitality specialist Whitbread were correct.
But there are wider potential consequences of the NLW for the UK economy that will also become clear over the coming months. And such potentially unintended consequences could bring about some vital changes in the economy.
First, the introduction of the National Living Wage could finally stoke some inflation in the economy after years of stubbornly low inflation. Indeed, the last time we saw the Consumer Prices Index measure of inflation at the Bank of England's target of 2 per cent was over two years ago, and inflation has dipped into negative territory in the intervening period. The weakness in inflation has meant the Bank of England has been able to resist the urge to hike up interest rates, leaving monetary policy as loose as possible. This has aided the economic recovery but has also stalled the process of normalising interest rates by returning them to anything near their historical averages.
Second, the hike in the wages of the lowest paid will contribute to wage inflation but is also thought likely to be passed on to end customers and consumers through price rises. This could begin to encourage wider inflation in the economy. Last year, Lord Wolfson, boss of Next, said that the NLW threatened to create "a harmful inflationary loop" in the economy and Whitbread also talked of selective price rises to meet the extra costs of rising wages.
But some companies will find price increases hard to push through - including many in FM. In such cases, businesses will look to improve the productivity of their workforces to offset extra wage costs. In a recent survey three in 10 firms said improved productivity was the best way to combat rising costs and pushing through such an agenda could also help to resolve one of the biggest head-scratchers of the recent economic recovery - the woeful lack of improvement in productivity of UK workers. In previous rebounds productivity improvements have been to the fore; this recovery has seen employment grow strongly but productivity growth remain weak.
This could be about to change. Alongside those companies who are looking to meet extra costs through improved productivity, one in five public sector businesses says it expects to meet extra wage costs through job reductions. Indeed, the most recent three-month figures showed UK jobless numbers rose for the first time since the middle of 2015.
Whether the government intended its NLW to help boost productivity and encourage some inflation back into the economy or not, it is likely these will be among the big long-term economic consequences of the policy.
How successful firms are at passing on wage costs or mitigating them through better productivity will have a significant bearing on this, and also on the overall effect of the policy on corporate profitability in coming years.
Graeme Davies writes for Investors Chronicle