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Next chief says 'national living wage' could drive up inflation Next chief says 'national living wage' could drive up inflation
(about 7 hours later)
Next’s chief executive, Lord Wolfson, has said the “national living wage” will cost the company £27m a year until the end of the decade and risks creating a potentially harmful inflationary loop. Next’s chief executive, Lord Wolfson, has said George Osborne’s new national living wage will cost the company £27m a year by the end of the decade and risks creating a potentially harmful inflationary loop.
Wolfson, a Conservative peer and friend of George Osborne, said Next will have to raise prices to offset the cost of implementing the national living wage, although the increase could be as little as 1%. Wolfson, a Conservative peer and friend of the chancellor, said Next would raise prices to offset the cost of implementing the higher pay rate, although the increase could be as little as 1%.
His comments are the latest in a series from companies about the impact of the measure. Whitbread, the owner of Costa Coffee and Premier Inn, has said it will look at “selective” price rises to offset the cost of the new pay rate, and the recruiter Manpower said it has sent shockwaves through the labour market. Under the chancellor’s plans, the minimum wage for over-25s will increase from £6.50 an hour at present to £7.20 in April next year, before rising to at least £9 by 2020. Next’s pay rate for adult starters is £7.04.
Under the chancellor’s plans, the minimum wage for over-25s will increase from £6.50 an hour at present to £7.20 in April next year, before rising to at least £9 by 2020. Wolfson’s comments are the latest in a series from companies about the impact of the new higher pay rate. Whitbread, the owner of Costa Coffee and Premier Inn, has said it will look at “selective” price rises to offset the cost, and the recruiter Manpower said the new rate has sent shockwaves through the labour market.
The £27m annual cost to Next includes £11m to increase the wages of workers paid less than the national living wage at present, and £16m to increase the pay of the rest of the workforce to maintain differentials.
Wolfson said adding in the cost of general wage inflation, including the living wage premium (LWP), the wage bill would rise by £147m to 2020, which could add 6% to prices.
He played down the rises, adding that the withdrawal of tax credits in the last budget would inevitably have put pressure on wages anyway. “The LWP is not as expensive as it looks. Market forces would have put wages up anyway,” said Wolfson.
Wolfson declined to give a personal view on the higher pay minimum, saying he had been “misunderstood” after comments earlier in the year about the Living Wage.
“I don’t want to underestimate the difficulties of being on a starter wage,” he said.
In March, the Next boss had criticised those who were calling for firms to pay staff a Living Wage, saying that for some people £6.70 an hour was enough to live on. It prompted Mick Rix of the GMB union to call him “an out-of-touch arrogant hypocrite”.
Wolfson made his comments as Next posted half-year results. The company said sales had risen 2.7% to £1.9bn in the six months to July, with pre-tax profits up 7.1% to £347m.Wolfson made his comments as Next posted half-year results. The company said sales had risen 2.7% to £1.9bn in the six months to July, with pre-tax profits up 7.1% to £347m.
Next’s pay rate for adult starters is £7.04. Wolfson said workers who will qualify for the national living wage account for £100m of the company’s £600m wage bill. The cost to the company of incorporating it is “not immaterial but, in the context of Next’s wider cost base, is not transformative”, he said. Wolfson said workers who will qualify for the national living wage account for £100m of the company’s £600m wage bill. The cost to the company of incorporating it is “not immaterial but, in the context of Next’s wider cost base, is not transformative”, he said.
It will cost £27m a year for Next to reach the £9 level by 2020. This includes £11m to increase the wages of workers paid less than the national living wage at present, and £16m to increase the pay of the rest of the workforce at the same pace. Analysts suggested the effect of Osborne’s policy was likely to be felt throughout the labour market, pushing up pay not just for those currently paid less than the new rate.
“In summary, as long as the LWP [national living wage] is linked to 60% of the median wage, we believe that the burden is manageable,” Wolfson said. “The resulting price increases are also likely to be affordable in the context of forecast general wage inflation of 4.5% per annum. “The living wage is the tip of the iceberg as far as employers are concerned, because increasing salaries for the lowest paid has a knock-on effect on the pay demands of other workers,” said Hargreaves Lansdown senior analyst Laith Khalaf.
“There is an uncertainty as to what will happen in the event that median wage inflation is lower than the forecast 4.5% per annum. In order for the LWP to hit £9 per hour in 2020, inflation in the median wage needs to be 3.5%. If, however, wage inflation runs below 3.5% then achieving £9 in 2020 may be problematic, as it would mean raising the LWP above 60% of the median wage. “Your expert barista with three years experience is not going to be too chuffed if a trainee is getting paid the same amount as he is,” he said.
Wolfson warned that there was a danger of the higher pay level stoking inflation if the rise to £9 an hour by 2020 took it beyond the target of 60% of median pay.
“As long as the [national living wage] is linked to 60% of the median wage, we believe that the burden is manageable,” Wolfson said. “The resulting price increases are also likely to be affordable in the context of forecast general wage inflation of 4.5% per annum.
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But he added: “If, however, wage inflation runs below 3.5% then achieving £9 in 2020 may be problematic, as it would mean raising the LWP above 60% of the median wage.
“Such a move would mean that maintaining reasonable wage differentials would be likely to move the median level itself, creating a potentially harmful inflationary loop.”“Such a move would mean that maintaining reasonable wage differentials would be likely to move the median level itself, creating a potentially harmful inflationary loop.”
Wolfson also said Next was reducing the interest rate it is charging on its Directory credit card business, as it revealed a 3% decline in credit card customers.‎ From October it is lowering the interest charge from 24.99% to a still high 22.9%.‎
Wolfson said he wanted to bring rates down further but more importantly differentiate between lower and higher risk customers.
“We want to reduce the interest rate further . This is not the end of the journey … and we aim to differentiate between higher risk and lower risk customers.”