Four in Ten Small Firms Increasing Costs due to Higher Wages

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Ahead of today’s labour market update, new research reveals that small business owners are cutting profits and productivity-enhancing investments in an attempt to absorb inflation-beating wage increases.

Its new survey of more than 1,000 business owners shows that over half (51%) of small firms were paying all staff at least £8.21 per hour prior to this becoming the NLW rate in April. The figure rises to 56% among microbusinesses (those employing up to 10 staff).

The new research shows that the most common response to April’s NLW increase among small business owners directly affected by the change is to pay themselves less: seven in ten (71%) lowered profits or absorbed costs in an attempt to handle the hike. The other most-frequently cited responses are: increasing prices (45%), delaying investment (29%) and reducing hours worked by staff (23%).

April’s NLW increase coincided with the roll-out of fresh HMRC reporting requirements, higher employer pension contributions and increases to business rates. Previous research shows that the cost of government policy interventions to the average small firm is up £60,000 since 2011.

In March, the Government launched a widespread international review of minimum wage rates. Two months later, the Labour Party unveiled plans for a £10 minimum wage for all workers over the age of 16.
The Business Organisation FSB National Chairman Mike Cherry said: “Small businesses continue to be ahead of the curve on pay. More than half were paying all staff the current National Living Wage before they were obliged to do so – an even greater proportion were doing so in the smallest firms.
“We’re now seeing more small business owners than ever saying that living wage increases are impacting the bottom line. Their first instinct is usually to take the hit personally, paying themselves less rather than cutting staff.

The research also reveals small business readiness to extend the NLW rate to younger workers. Close to two-thirds (60%) typically pay 21-24 year olds at least £8.21 an hour, considerably above the £7.70 minimum wage rate for this age group. Previous FSB research shows that well over half (58%) of smaller firms employ a worker aged 16-24.

As part of its consultation response, FSB recommends “gradually bringing the apprenticeship rate more closely in line with the under 18 rate”, while cautioning that “extra care must be taken to ensure the level set does not adversely affect take-up of apprenticeships”. Apprenticeship starts have tumbled in recent years.

Mike Cherry added: “There’s a conversation to be had about increasing pay for younger workers – especially those just below the National Living Wage threshold, and those entering the workplace straight from school. That said, the greater experience and expertise usually held by older employees must continue to be recognised. Any changes should be gradual and carefully monitored, especially in such an uncertain climate.”

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