Minimum Living Wage vs. Inflation: Impact On Recruitment & Retention

Minimum Living Wage vs. Inflation: Impact On Recruitment & Retention

The UK is facing a cost of living crisis not seen in decades. Figures from the Office for National Statistics show that 83% of adults saw an increase in their cost of living in March 2022. Recent analysis suggests that workers in the UK will need pay rises of 8% to keep up with cost of living increases. 

There are debates about whether raising pay at such a dramatic rate will worsen the economic crisis in the UK. This has left many business decision-makers wondering what to do to attract and retain talent. How can companies adapt recruitment and talent retention strategies to compete? 

 

The Current Market

Analysis suggests that most companies will be awarding an average 3% increase in wages to employees this year. While this is the largest pay rise workers may have seen for quite some time, it is still far below the rate of inflation. 

The current rate of inflation is 7% which is the highest it has been for the past 30 years. Inflation has been rising for a number of reasons. The price of energy bills is one of the key driving factors, with bills increasing on average by £693 for households from the start of April. Fuel costs have risen dramatically (by £12.6p per litre) and rail fares increased by 3.8% as well. Other changes pushing up inflation include higher interest rates – which mean higher mortgage payments – an increased VAT rate on some goods and services, and higher air passenger duty, among others. The cost of food is also projected to rise by 15%.

Another factor affecting the current market is the war in Ukraine, which is creating unusually inflationary pressure on the things people use in their daily lives, and this will continue for some time to come.

To counteract the rising inflation, employees’ wages will need a 7% rise in pay, since living wages are not keeping up with the real costs that people face every day. This is despite the fact that there have been increases to the National Living Wage to £9.50, representing a 6.6% increase in pay for many workers. This is still lower than inflation, which means that many workers are receiving a pay cut in real terms.

 

Inflation vs. Living Wage

Some economists believe that raising wages substantially increases inflation, a phenomenon described as “wage-push inflation.” ​​Business decision-makers do not want to contribute to inflation, but there is conflict around this theory and the impact this has – and experts’ thoughts are mixed. Some studies show that the effect of wage-push inflation is minimal. For example, research by the Upjohn Institute based on several decades of data from the USA from the late 1970s until 2015 showed that prices increased by just 0.36% for a full 10% minimum wage increase. This does not really support the theory of wage-push inflation and suggests that there are other variables to be considered. If the findings of the Upjohn Institute are believed, then employers can raise wages without worrying about the effect on inflation.

However, some economists opine that raising the minimum wage in this way drives inflation by producing imbalances and distortions in the employment market. The government, Bank of England, and business leaders are asking for businesses to keep pay rises lower due to the risk of hyperinflation, hoping to contain inflation. 

This is why it’s important to understand the impact of pay rises on inflation has on businesses, so organisations can make informed decisions on what’s best.

 

The Effect On Recruitment And Retention

The reality is that when faced with making choices about basic necessities to live, workers on lower pay levels (including minimum and living wage) will be very likely to make decisions based primarily on their pay packets. Making a decision to go where the money is, is easier for workers as a result of supply and demand dynamics. 

Recent reports show a shortage of candidates to fill vacant roles. There are a number of underlying reasons for this. One is Brexit and the fact that there are fewer workers from the European Union in the UK to backfill roles. The second factor is low unemployment – so fewer people are looking for jobs in the first place. A third reason is general public uncertainty, caused in part by the Ukraine war, leading to a reluctance among employees to leave current positions held. 

For job seekers, it is a buyer’s market, as demand exceeds supply. Figures show that the number of job vacancies between January to March 2022 rose to a new high of almost 1.3 million. The ratio of vacancies to jobs displays “record highs” in eight of the 18 industry sectors.

As a direct response to these issues, some employers are already raising their wages to attract and retain the staff they need, while remaining competitive in the hiring market. For example, Tesco has raised its wages by nearly 6%. In general, companies that work in sectors that formerly employed high levels of European Union citizens are responding by increasing rates of pay. Research by Indeed shows that the highest pay growth has been seen in construction, driving, food preparation and service, production, and manufacturing, and personal care and home health. 

It’s clear to see that there’s pressure on business leaders to take action on pay awards. Inaction could in itself influence staff to leave, and it could be more costly for businesses to replace them or could take long periods to attract new staff – which can affect businesses in other ways. Some believe that higher salary costs could lead to financial uncertainty for some small businesses. However, higher salaries are proven to showcase employee value and help with morale and retention. Company leaders will need to discuss the right course of action to take that will ensure they’re retaining recruiting top talent. 

 

What Does This Mean For Employers?

The inflationary pressures are rising and may continue to rise, especially as the effects of the war in Ukraine are felt. It’s a difficult situation for those who have to make these decisions for their business, however, it’s necessary to ensure recruitment strategies are up-to-date and are able to navigate the new employment market.

As organisations try to prepare to make decisions around this, one strategy business leaders can discuss is if they plan to keep their annual reviews. Or, possibly discuss a stepped approach – as in giving a bonus now to employees, with the promise of a pay increase when the time is right. 

During this time, it is also worth noting that salary is not the only reason that attracts and retains employees. There are other ways to reward workers since compensation might not be the only reason an employee is considering leaving their job. For example, People Management suggests considering how perceived benefits such as flexible working can tip the balance for some employees. Other features of the employer value proposition that are compelling for employees include opportunities that allow for growth and development, or focusing on the physical and mental well-being of workers. These types of options may be very worthwhile considering for firms that are already finding it challenging to keep ahead of fast-rising costs. Showcasing employer brand and the ancillary benefits that employees get is also crucial when attracting and retaining employees, since companies can share what separates them from other organisations. Highlighting activities that demonstrate a focus on diversity or on inclusivity for women can set a company’s employer brand apart and help them compete in a tough labour market.

Also, organisations must continue to find ways to stand out and keep their pipeline engaged and create new ways to keep talent warm. This is why focusing on candidate engagement strategies can also be beneficial, since companies will have the ability to showcase their employer brand and the reasons why employees feel valued and supported – which can help active and passive talent see what makes the organisation stand out.

 

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Many organisations are feeling the effects of lower revenue as people cut back. There’s no magic formula to the balancing acts that everyday business leaders have to negotiate. However, when devising recruitment and retention strategies, many companies will have to take action and update the recruitment strategies to fit this new market. 

If you’re looking for help on your recruitment and retention strategies, reach out to Recruitics!

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