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The introduction of the National Living Wage has had a negative effect on the UK's already ailing productivity, a think tank has said.

The Institute for Public Policy Research (IPPR) said businesses are offsetting the added wage costs by cutting bonuses, overtime and staff benefits. The research shows that low-paying industries, like retail, hospitality and food & drink, and admin, are the worst affected areas, averaging productivity 29% lower than the rest of the economy.

Workers in these industries were also found to be less qualified than their counterparts across Europe. And British employers are less likely to offer training on the job, meaning the gap is less likely to close.

Despite the report finding that the National Living Wage has also cut investment in new technologies, the IPPR called on low-wage employers to boost investment in tech aimed at boost productivity. It urged Innovate UK to expand its funding to workplace organisation and wants to see the launch of regional growth hubs focused on boosting productivity in low-wage sectors.

Tom Castley, vice president EMEA at Xactly, said: "Cutting staff bonuses to save money is absolutely a false economy. Our own recent research found that, for over a quarter of UK employees, a financial bonus is their main motivator. In order to boost productivity, businesses must boost employee engagement, and for this, financial incentives are clearly key.

“There is a distinction between people’s salaries and bonuses, as psychology Frederick Herzberg has argued. Salaries are a maintaining factor, that get people to work every day. Bonuses are what motivate them to be engaged and productive, ultimately increasing profitability. Consider it in terms of a race – without financial incentives, staff will walk to the finish line, maintaining the status quo. Bonuses are what encourage them to get there faster, or even find new and more effective ways of completing the distance. This isn’t about businesses throwing money at the problem at a time when budgets are tight. However, smart, performance-based rewards boost staff engagement and attainment, securing businesses’ success for the future.”