Pay-Setting Among Employers in the Agriculture, Cleaning, Hospitality and Retail Sectors

Main points

• The consequences of these events are far-reaching but include impacts for employers in the low paid and labour-intensive sectors, particularly for smaller businesses. These developments have the potential to impact employers’ pay setting decisions, including decisions regarding pay levels, pay differentials, progression and pay reviews. A better understanding of the ways in which these factors affect employer pay setting is crucial for an understanding of how these employers responded to recent changes in the National Minimum Wage and the National Living Wage, and for discussions about how they will manage future increases to the National Minimum Wage and the National Living Wage (NMW/NLW).
• In this context, building on previous qualitative projects commissioned by the Low Pay Commission (LPC), this research aims to broaden the evidence base on employer pay setting decisions and how those are influenced by the changing economy, and could be influenced by future NMW and NLW rises.
• This qualitative research project is based on semi-structured interviews with employers in four low-paying sectors: hospitality, retail, agriculture and cleaning. These sectors are all in the ‘top 5’ low paying sectors in the UK, with between 20-45% of jobs in each sector being paid at or below two thirds of median pay (ONS, 2022). Senior managers in 41 businesses across the UK were interviewed to explore how they set pay and why, how their pay setting has been influenced by the changes in the NMW and the NLW rates, as well as the contextual factors over the recent years, and what strategies they have for managing future rises in the NMW and NLW.

The key findings of this research are:

• Employer pay-setting behaviours varied by employer size and sectors, with smaller employers in particular having more informal and relatively unstructured pay-setting processes. Some employers interviewed reported paying employees above the NLW rates, with key reasons for that being staff recruitment and retention, and a desire tomake employees feel valued.
• Some employers reported not using the NMW youth rates, due to concerns around fairness. Others chose not to use the NMW youth rates or specifically target younger workers in their recruitment as they felt that younger workers were not as productive as more senior workers and required more training. Those employers specified that they would not employ apprentices due to the extra responsibilities this would put on the staff in charge of training them.
• The strategies that employers mentioned they use to absorb the NLW/NMW increases included increasing prices, reducing their workforce size, reducing pay rises or staff hours, finding efficiencies to reduce overheads, and using their own time or money to cover the gaps. Small and medium-sized employers reported finding it harder to absorb the annual increases in the NMW/NLW rates. Smaller employers were more likely to use short-term strategies or invest their own time and money, while some larger businesses spoke about more long-term solutions such as investing to improve productivity.
• Employers described increasing challenges they experienced in the contexts of rising prices, the effects of the COVID-19 pandemic and Brexit. Some of those challenges included staff shortages, complications of supply chains, increasing costs and bureaucracy of exporting goods to Europe, operational difficulties, increasing costs of operating and changes to customer spending habits.
• Employers found contextual challenges hard to disentangle. They instead reported it was the high rates of increase to the NMW/NLW, alongside compounding contextual impacts, that had made pay setting and employment more challenging of late.
• Some employers reported having already recovered or found strategies to offset contextual challenges, while others, particularly small employers, raised concerns about their ability to absorb NMW/NLW increases in this context, and subsequently concerns for the future of their businesses.

Overall, the findings of this research highlight some challenges that employers, particularly small businesses, face in relation to NMW/NLW increases, with some reporting facing potential business closures or employment cuts. As this study is qualitative and based on a small sample, the findings are not quantifiable or generalisable. However, as the findings suggest that it is small employers who report potential business closures, it could be argued that this is unlikely to have an impact on employment on the aggregate level. This would be the case if workers were then moving to larger companies, as was observed by Dustmann and colleagues (2021). This research highlights some areas where further attention may be needed to support small businesses in managing the NMW/NLW increases, particularly in relation to impact on small business owners and safety of operations for workers.