What does the National Living Wage mean for construction?
By Tristan Watkins, CEO, BNP Paribas Leasing Solutions UK
The flagship policy from George Osborne’s final budget as Chancellor of the Exchequer was undoubtedly the National Living Wage (NLW), which, as of April 2016, is already in effect. Over-25s working in London now earn an hourly minimum of £9.15, outside of London the hourly minimum is now £7.20. What’s more, these wages will increase by £1 an hour every year until 2020.
So what does this mean for the construction industry?
Deconstructing the NLW
Construction isn’t a breadline industry anymore: demographically speaking, most workers qualify for the increase. Indeed, the 45-49 age range has the most manual construction workers of all. But the industry average across all regions is well in excess of the new minimums. By 2020, it’s entirely likely that most construction workers and companies will be completely unaffected by the National Living Wage.
Construction wage growth is actually double the national average due to sheer demand. Unions lobby for salary hikes on a regular basis: 400,000 construction workers are expected to receive a 2.5% pay rise this year, and a further 2.75% pay rise next year – considerably above the projected inflation of 0.3%.
For the most part, construction salaries are already in excess of the NLW, and the market’s pay rises are often influenced by non-governmental forces. If your business model is robust, you have very little to fear from the national pay rise.
Laying the foundations for success
If construction CEOs are going to worry about their margins, there are bigger fish to fry than the red herring of the NLW. There’s the recent vote to leave the EU, the news that the sector has fallen into recession for the first time in four years, the endemic skills shortages that are pushing up the cost of skilled labour, and other long-term problems that have plagued the sector for decades.
Productivity, for example, has increased by only 7% over the last twenty years: significantly below manufacturing, services, and the rest of the economy. Wage growth positively influences this metric, but the industry should be actively investing in measurement to identify inefficiencies, as well as training and education to iron them out.
Financial management is also a big issue for the industry: a small firm that wants to expand either has to strain its cashflow or deplete its cash cushion. Outlay on equipment and machinery doesn’t help matters – especially when it needs to be replaced every few years, either due to obsolescence or breakdown. When this expenditure is mitigated by cost-effective monthly leasing agreements, finances immediately become more predictable and more manageable than if the company’s cranes and tunnelling machines were bought outright. The latest, most-up-to-date equipment offers considerable efficiency savings: they may be retailing at a higher price, but leasing models offer greater access to them for cost-conscious customers.
The NLW may well inconvenience some firms, but it is unlikely to pose much of threat to any statistically significant number of them. Construction firms can mitigate what little impact the law will have by focusing instead on improving productivity and smarter financial management.