Analysis of the Budget’s ‘living wage’, which will rise to over £9 by 2020, has focused on the cost to retailers.

Analysis of the Budget’s ‘living wage’, which will rise to over £9 by 2020, has focused on the cost to retailers.

It observes that by and large most large retailers will be able to absorb or pass this on as just another factor of inflation.

But this misses the longer term impact on the retail industry. 

Changes to tax credits, minimum wages and taxes form a coherent new policy agenda which could transform the market for lowly-waged labour.

It is clear that the government is no longer willing to pay in-work welfare, seeing it as not only unaffordable but as a subsidy to corporates which undermines the incentive to increase productivity.

By capturing Labour territory, George Osborne may well have set a trend whereby politicians of all parties will vie to increase the living wage as the token of a progressive economic agenda.

We could therefore be entering a period of continuous real wage growth: something which has been absent since the start of 2008.

A likely response by retailers will be to seek further efficiency, especially through labour-saving technology and simplified store operations. 

So expect even more self-checkouts, self-scanning with mobile payments, shelf-ready packaging, and narrower ranges, fewer promotions and streamlined offers.

A further tactic could be to employ more young people under the age of 25.

All this will accelerate changes in the shape of retail. Online retailers, more able to pursue automation than multi-outlet physical ones, will be advantaged – unless the uneven playing field is addressed in a future business rates review. 

Discounters, already benefiting from a low-labour cost model, will be even better placed to grow their share.

But a response to rising wages which focuses only on taking out hours may miss the bigger picture. 

Retailers will need to find a way to make employees more productive, or better still, more valuable. 

HR will become a more strategic function. The days of 30% to 40% annual staff churn could come to be seen as a shocking repeated loss of capacity and knowledge, inhibiting investment to develop and nurture the best employees.

Most retailers now know far more about their customers than they do about their colleagues. 

Data analytics has yet to permeate the HR function. Encouraging loyalty in their employees, in the way that many retailers do with their customers, could be an essential approach if the UK moves to a high wage, low tax economy.

Customer lifetime value is a concept which many retailers are learning how to measure and influence. 

But employee metrics are often crude – such as aggregate output per hour – and bear inadequate connection to corporate strategy.

Strategies to improve performance and develop human capital among even the lowest paid will require much better information on what drives engagement, motivation and retention, and how these can support overall corporate goals.

The Chancellor seems to have given up waiting for increases in productivity to allow raises in the minimum wage, and has decided to try the reverse approach.

If their margins are not to be squeezed, retailers had better respond by developing strategies to create more value from their people. 

  • Michael Jary is partner at OC&C Strategy Consultants