Can SMEs absorb the cost of a higher minimum wage?

Posted on: 31 January 2014

Chancellor George Osborne’s recent call for above-inflation rises to the minimum wage caused political debate. What would a rise mean for SMEs?

The political debate about the pros and cons of minimum wages has raged ever since Labour introduced them in 1999. At the time, the conservatives opposed the concept. But on the eve of Labour Leader Ed Miliband’s announcement of his plans for reforming Britain’s high street banks, George Osborne chose to reveal his proposal for dealing with the UK’s ever-rising cost of living: he announced his support for an above-inflation rise in the minimum wage.

Was it a political move or a genuine effort to improve the economy? Either way, the potential impact on SMEs is continuing to be debated.

As of October 2013, the minimum wage is £6.31 per hour for over 21 year olds. The Chancellor wants to see an above-inflation increase to £7 an hour by October 2015.

John Allan, National Chairman of the Federation of Small Businesses, is concerned. He commented on the impact on small businesses in traditionally tight-margined sectors like retail and social care, and the fact that some regions in the UK are still struggling to recover from the economic downturn. Having higher wage bills won’t help.

In an interview with Radio 4’s Today programme Mike Cherry, national policy chair of the FSB, also highlighted that an increase will only add to the pressure SMEs are already feeling from crippling energy prices and business rates.

In summary, increasing the minimum wage by too much could cost SME jobs, make some less competitive and render others unable to invest – all key to continued economic recovery.

However, the minimum wage is determined by an independent body called the Low Pay Commission. They will make a decision as to the level of any rises based on the cost of living and the ability of businesses (large and small) to afford to pay higher wages. So perhaps SMEs should be thankful that pressure is being put on them to increase wages so that consumers have more money to spend on their products and services.

Either way, in light of Vince Cable’s announcement that as of next month tougher penalties will be imposed on employers who don’t pay the minimum wage (fines could be £20,000), SMEs don’t have much choice but to play ball, whatever the figure.

It could even be worth their while to pay the Living Wage. This is independently calculated by The Living Wage Foundation based on the basic cost of living in the UK. Through it, more than 500 businesses (450% more than in 2012) have voluntarily signed up to paying at least £8.80 an hour in London and £7.65 across the rest of the UK. But how many of UK businesses are small entities that struggle to afford the real minimum wage even as it is?

Unfortunately no-one can answer the question as to whether or not SMEs can absorb the cost of an increase in the minimum wage until it actually happens. And it’s the Low Pay Commission’s role, not the Government’s, to decide if and when that might be.

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