Productivity gains will be key to managing costs.

Future increases to the National Living Wage (NLW) could affect up to 20% of the workforce within four years, and the full impact may not have been considered by Scottish businesses unaffected by recent changes.

On April 6, the NLW was introduced for all employees aged over 25, obliging employers to pay at least £7.20 an hour which according to the ONS, impacts up to 10% of UK workers. 

But by 2020 the UK Government wants this to increase to over £9 an hour, and the Office for Budget Responsibility predicts this will equate to an annual salary of around £18,000[1], doubling the number of workers who fall under NLW rules.

Alistair Black, Head of Consulting at Johnston Carmichael, says the four-year trajectory represents an average year-on-year increase of over six percent – when average wage growth over the last few years has been less than two per cent.

Alistair said: “Most businesses have understandably been focused on the immediate impact of this year’s changes, but now the dust has settled it’s really time to think about what it’s going to mean in the next few years.

“Unless there are improvements elsewhere in the business, the cost of this is going to have to come from profit margin, and that’s not a message any business owner will want to hear. The reality is that global competition and pressure across the rest of the economy pretty much rules out root and branch price increases, so there’s a real incentive to look at how businesses can be more productive.

“That can mean a range of things from increased automation to streamlining business processes, but the key measure will be in preserving profitability in the face of a rising wage bill. This issue won’t be the sole preserve of traditionally low-paid industries for very long, so companies should start thinking now about how they’re going to take this opportunity to create a fitter, sharper organisation which is better-able to withstand challenges out with their control.”

At the end of 2015, UK productivity fell at its fastest rate since 2008, according to the Office for National Statistics, with worker output per hour down 1.2 per cent.

Alistair said: “Productivity has long been the Achilles heel of the Scottish economy and remains an elusive prize. However, there are clear, proven steps which companies can take to make their operations more productive – and therefore more profitable - without increasing prices or making swingeing cuts to headcount and capability. Putting these in place now will reap long-term rewards, and we’re already supporting a number of clients who are facing up to the challenge.”

[1] Assuming a 37.5-hour working week.

Need assistance - Get in touch

If you feel your company could benefit from an operations review to increase productivity contact Alistair Black to arrange a consultation at alistair.black@jcca.co.uk or on T: 07435 753209.