Cleaning up

GUESTS who check in to the Wizard Chambers at the Georgian House Hotel in central London don’t just get any old greeting at reception. They descend into a basement guided by candles, to neo-Gothic rooms decorated with faux-tapestries and antlers. The beds, naturally, are four-posters; breakfast is soon to be served on pewter plates. The Harry Potter theme was designed to attract children, says the hotel’s owner, Serena von der Heyde, but is now a big hit with adults; the four chambers are booked up months in advance.

Thus business should be looking up for the 60-room hotel. But instead of putting her feet up, Ms von der Heyde has a dementor to deal with: rising wages. Since the financial crisis of 2008, wages have been in the doldrums. Meanwhile, the number of low-paid jobs has been increasing relative to others (see chart). But now that is changing. Real wages rose by 2.7% in the three months to April, a rate not exceeded since before 2008. And in his budget speech on July 8th, George Osborne, the chancellor, announced a 38% rise over the next five years in the minimum wage, now called the “new living wage”.

Ms von der Heyde has already been raising the wages of her two-dozen staff a little, in part to improve service in the hotel. Most now earn just over the current minimum wage of £6.50 ($10.15) an hour. She calculates that bumping up their pay to the £9 required by 2020, while maintaining existing pay differentials among employees, would add £107,000 to a wage bill that currently amounts to about £500,000 a year. “That would kill us”, she says.

In a labour-intensive sector like hospitality, where wages are one-third of firms’ costs, alarm bells are ringing over the sudden rise. Few businessmen are against the idea of a living wage—indeed, most claim to support it. But they have been disconcerted by the suddenness with which it was introduced, as well as by its steepness. Many complain that the government is doing too little to lighten other burdens. A new auto-enrolment pension scheme is adding to their costs. Those in hospitality and tourism are crosser than ever about the 20% rate of value-added tax, which is twice the average rate levied in Europe on the tourism industry.

Consequently, people like Ms von der Heyde have some tough decisions to make. She is unwilling to raise prices to pass the extra costs along to customers, as London is already expensive. So pay differentials may have to go, meaning that senior employees won’t get wage rises in line with the lowest-paid. The hospitality industry already employs a younger workforce than any other big sector (about one-third are under 25); many hotels and bars will hire more youngsters, who do not qualify for the new living wage until they are 25 years old. That should at least help to reduce youth unemployment, currently 16%.

Other industries have less wriggle room. Of the 1.5m people employed to look after 500,000 mainly elderly people in residential care, about one-third are on the minimum wage. Martin Green, the head of Care England, the industry’s lobby group, says the cost of the new living wage cannot be passed on to customers, as these are mainly cash-strapped local authorities that have had their funding slashed. As a highly regulated sector, with tightly monitored staffing levels, it will be hard to shed employees. So, Mr Green says, “some services and domiciliary care will close” (see article).

James Lowman, head of the Association of Convenience Stores, is similarly gloomy. “Certainly hundreds, possibly over 1,000” corner- and village-shops will shut, he says. The Office for Budget Responsibility, Britain’s fiscal watchdog, has predicted that 60,000 jobs will go as a consequence of the new living wage.

Yet there is a limit to the number of low-paid jobs that will be cut, says Stephen Machin of the London School of Economics, for the simple reason that in many businesses labour cannot easily be replaced by capital. Ms von der Heyde says that she will try to get more out of her cleaners, by paying more attention to their timekeeping, for instance, but that in the end “you can’t clean our rooms by robot”. Similarly, workers in the care sector need emotional as well as physical skills, which are not readily replaceable by technology. Robots don’t (yet) make very good company.

The jobs in immediate danger from rising wages are the more routine ones, such as in administration or manufacturing, that can be more easily automated. Many of these are jobs that command average wages. Academics call this hollowing-out of middling professions “job polarisation”, whereby those highly skilled workers, who can harness technology to their work, keep their jobs, as do those such as nurses, who can’t be replaced by machines. Which is good news, of course, for the hard-working cleaners of the Wizard Chambers.