The national living wage has had a detrimental impact on the UK’s low-wage sectors, according to a new study by the Institute for Public Policy Research (IPPR).

The think tank said today that the introduction of the National Living Wage had increased the salary bills for low-wage sectors, including retail and hospitality – and the extra costs have sapped the funding for investments in productivity and technology.

It said that the UK’s low-wage sectors, including retail, accommodation, food and administrative services, employ a third of all workers and produce 23% of the UK’s gross value-added. However, on average they are 29% less productive than the economy as a whole.

The IPPR said businesses were instead reacting to the Chancellor’s policy by raising prices or cutting costs including overtime pay and staff perks.

The report stated: “If significant numbers of businesses choose instead to deliver the [National Living Wage] through higher prices, reductions in non-wage benefits or training, or reduced profits, while we will still see a welcome increase in the incomes of some of the lowest-paid in society, this may not be sustainable over the long-term.”

IPPR called on firms employing low-wage workers to invest in productivity-enhancing technologies and training, or to review their business models to find more efficient ways of doing things.

The policy body’s recommendations included urging Innovate UK to use its open programme to expand its funding criteria to innovations in workplace organisation. It also suggested launching growth hubs to provide targeted advice to businesses in the low-wage sectors.

It went on to say that local partners should be encouraged to include their plans to prioritise the performance of their low-wage firms when they bid into the Local Growth Fund.

The think tank also advised businesses to establish degree apprenticeships for the biggest low-wage sectors, starting with wholesale and retail, to boost skills of employees.