Prices up, hiring down: SMEs react to Living Wage

Small firms expect to slow hiring and increase prices in response to the government's National Living Wage for those over 25.

Small firms expect to slow hiring and increase prices in response to the government’s National Living Wage for those over 25.

A survey of employers by the Federation of Small Businesses has found significant numbers of small firms concerned about the impact the new wage rate will have on their businesses.

The research finds that more than a third (38 per cent) of small employers expect the new National Living Wage of £7.20 an hour to negatively impact their business when it comes into force in April 2016. 

When asked to consider the projected rise in the National Living Wage to at least £9 an hour by 2020, 54 per cent say it will have a negative impact.

Just 6 per cent of businesses think the policy would have a positive impact on their business when it is implemented next April.

When businesses that said they will be negatively impacted were asked how they will adapt to the new National Living Wage when it comes in, just over half (52 per cent) say they would put off hiring new staff while 50 per cent say they will raise their prices.

Businesses in the wholesale and retail sector, and those working in accommodation and food services, are most likely to say the National Living Wage will have a negative impact.

In addition, businesses in Yorkshire, the West Midlands, Wales and the South West are among the most likely to cite a negative impact.

According to the FSB’s latest Cost of Employment Index, for a small retail business with six full time staff aged 25 or over and earning the current adult minimum wage, the National Living Wage will cost an extra £5,900 a year from April 2016.

Annual labour costs for this business stand at approximately £127,700. Even after claiming the higher employment allowance (which is set to rise to £3,000 next year), these costs are set to rise to £133,600 in April 2016 due to the National Living Wage.

In other words, the £3,000 of potential savings to employers from lower national insurance contributions will reduce the £8,900 higher wage costs incurred in this case, but will still require this employer to find nearly £6,000 to cover the additional costs. 

This takes place just six months after employers have already increased wages due to the increase in the minimum wage on October 1st 2015.

FSB national chairman John Allan says, ‘Over half of our members already pay their staff above the voluntary Living Wage, but those that don’t are often operating in highly competitive sectors with very tight margins.

‘In many of these industries, the only sustainable way to deliver real long-term wage growth is to improve productivity. Without improved productivity there is a real risk that higher enforced statutory wages will lead to fewer jobs being created, fewer hours for existing staff and, unfortunately in some cases, to job losses.’

Other steps businesses plan to take to manage the higher wage level include: cutting staff hours (41 per cent), reducing staff numbers (31 per cent), cancelling or postponing planned investments (29 per cent) and eroding pay differentials by freezing or cutting the wages of higher paid staff (26 per cent).

Almost a third of businesses owners expected to absorb the cost through reduced profits (29 per cent).

Further reading on the National Living Wage

Ben Lobel

Ben Lobel

Ben Lobel was the editor of from 2010 to 2018. He specialises in writing for start-up and scale-up companies in the areas of finance, marketing and HR.

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