National Living Wage 'to cost employers £20bn'

George Osborne's planned rise in the National Living Wage to £9 an hour for over-25s will leave employers with an additional £20 billion bill for workers' pay by 2020 compared to current levels, according to a new report.

And the burden will fall hardest on companies outside the wealthy South East, as well as in sectors with large numbers of low-paid staff, such as food and hospitality, where almost half of employees will get a pay rise, found the University of Lincoln study.

The cost to employers detailed in the study is significantly higher than the official £4 billion estimate made by the Office for Budget Responsibility, because - unlike the OBR - researchers did not factor in predicted rises in salaries, including the minimum wage, over the coming years.

The Lincoln study found employers in the North East will be the hardest hit in England, facing a 3.7% increase in total wages (£625 million), closely followed by Merseyside and Yorkshire and Humberside (also 3.7%) and the East and West Midlands (both 3.5%). By contrast, the pay bill in London will rise by just 1.6% and the South East by 1.9%. Northern Ireland's total pay will rise by 3.9%, Wales's by 3.6% and Scotland's by 2.6%, researchers found.

More than a quarter (28.9%) of staff in the health and social work sectors will receive an earnings boost, leaving employers to find an extra £3 billion.

And 46.3% of workers in hospitality and catering will gain from the National Living Wage hike, with a total £2 billion increase in their pay packets equating to a 10% rise in the overall cost of salaries in the sector. The retail sector will also be profoundly affected, with 42.7% of workers benefiting to the tune of £4.4 billion - a 6.4% rise.

Local authorities will need to find almost £1.7 billion extra in their budgets to cover the wage increases, and the charitable sector will face a £500 million annual cost increase, the study found.

Report author Stephen McKay, social research professor at Lincoln University's School of Social and Political Sciences, said: "While the move to a National Living Wage is welcome, the cost to employers of implementing these wage increases must not be under-estimated, particularly in those parts of the UK where a significant proportion of the workforce are employed in local authority, health and social care or charity sectors.

"These are precisely the areas facing the largest percentage increases, with older workforces and a high proportion of people on or just above the current Minimum Wage.

"Budgets in these sectors are already under extreme pressure and further cuts in central grant funding are expected in local authorities and charities over the next five years. It is difficult to see how employers will find hundreds of millions of pounds to meet their additional wage costs in these circumstances. It would be a tragedy if the impact of the National Living Wage is the loss of public services and jobs."

The Chancellor announced in his July Budget that a new, compulsory National Living Wage would be introduced for workers over the age of 25, worth £7.20 per hour from next April, rising to £9 per hour by 2020. This represents a significant hike from the current National Minimum Wage of £6.70 an hour for over-21s and compares to the voluntary Living Wage, calculated by the Living Wage Foundation at £7.85 an hour or £9.15 in the capital.