Going Up

Twenty years ago this month, when the United Kingdom implemented a minimum wage, some cautioned that the impact would be dire. Companies, they claimed, will face exponentially higher labor costs, stop hiring, and slash jobs.

Those warnings came back this week, as roughly 2 million workers got a 4.9% government-mandated pay bump. If history holds, the region on the whole will take the change in stride; unemployment has fallen considerably (it’s now at the lowest level in 40 years) even while the UK raised the minimum wage repeatedly. “The demand is there for people,” says Benjamin Frost, a reward product expert with Korn Ferry. “The job market in the United Kingdom is very strong, and unemployment is as low as it realistically can be.”

But experts say company leaders are going to face a lot of pay-related challenges as the minimum wage continues to bump up both in the UK and globally. Indeed, the push for a so-called living wage was one of the main demands of the gilets jaunes protestors in France this year and the “Fight for $15” movement in the United States. Firms are having to grapple with everything from when to deploy robots in some of these jobs, to how much to alter benefits, to realizing higher wages shift the type of talent they can attract and seek out.

Certainly, from a worker’s standpoint, pay is heading in the right direction. Most UK firms, even in retail and fast food, are paying above the government-mandated minimum—which as of April 1 is £8.21 ($10.74) per hour. To keep a lid on costs, Frost says, many UK leaders have altered benefit packages rather than firing workers or raising prices. For instance, companies used to provide a paid one-hour lunch; now those lunches cover 30 minutes. Or, if organizations offer healthcare, they may start to thin out the types of policies they provide, with fewer features covered by the employer.

Some UK organizations are also keeping down labor costs with “zero-hour contracts.” Under these contracts, businesses aren’t required to guarantee employees a minimum numbers of work hours (zero-hour rules are common in other parts of the world). This saves companies on labor costs because they don’t have to pay for work that isn’t completed. Companies may not be able to rely on these types of rules forever, Frost says, because they can create job insecurity for hourly workers; no hours means no paycheck. “That may be something the world’s going to have to confront in 10 to 15 years,” he says.

The wage increases, along with an increase in benefit costs, also have helped spur some firms to invest more heavily in robotics and artificial intelligence. The theory is that self-checkout kiosks, in-aisle price scanners, and similar innovations can cut down the number of hours worked without sacrificing revenues, says Craig Rowley, a Korn Ferry senior client partner who specializes in retail. At the same time, leaders are challenged by wage compression, paying new hires at the higher minimum wage while keeping existing workers at their current pay levels (if at or above the new rate), which risks employee engagement. “You have to cut costs somewhere else, and you have to limit salary raises elsewhere if you want to maintain a healthy profit,” Rowley says.

Over the longer term, changes to the minimum wage in any country could alter the types of people who want certain jobs, and how a company goes about attracting and retaining those people. Retail at one time used to be a lucrative industry for millions of professionals who used to roam sales floors in suits, Rowley says. “It’s going to fundamentally change the jobs people take and the jobs people want.”