The minimum wage and its impact on SMEs

POSTED: 24th April 2014
IN: Business news

The Department for Business, Innovation and Skills last month announced that the national minimum wage will be rising to £6.50 per hour from October 2014.

The Department for Business, Innovation and Skills last month announced that the national minimum wage will be rising to £6.50 per hour from October 2014.

Confirming its acceptance of recommendations from the Low Pay Commission (LPC), the government said more than one million people are set to see their earnings go up by as much as £355 a year. undefined

The rise - which is the first above-inflation increase in the minimum wage since 2008 - will represent a significant change for many workers and their employers.

How is the minimum wage changing?

The adult national minimum wage will rise by 19p, or three per cent, from £6.31 to £6.50 per hour from October 1st this year, while the rate for 18 to 20-year-olds will increase by two per cent from £5.03 to £5.13 per hour.

Apprentices and 16 to 17-year-olds will also see their basic rate of pay go up, to £2.73 per hour and £3.79 per hour respectively.

Announcing the changes, business secretary Vince Cable said he had asked the LPC to consider how the real value of the minimum wage could be restored as the economy recovers.

He also noted that the LPC's forward guidance - which included plans for bigger basic pay increases in future than in recent years - improves understanding of how economic revival can mean stronger growth in wages for low-paid workers, without costing jobs.

"The experts will continue to advise government on future wage rises to help the low paid, and in the meantime I urge businesses to consider how all their staff - not just those on the minimum wage - can enjoy the benefits of recovery," added Mr Cable.

Business impact and reaction

There is no doubt that the increase in the national minimum wage will have an impact on businesses, particularly small and medium-sized enterprises (SMEs) with relatively small workforces.

Wages represent a significant cost for SMEs - along with overheads like rent, utilities and insurance - so any mandatory rise in basic pay is likely to impact profit margins.

Despite this, the response to the government's recent announcement from business bodies was generally positive.

The Forum of Private Business (FPB) said the confirmed increases represented a fair balance between the needs of employers and workers.

Phil Orford, chief executive of the FPB, said the group was pleased that the government had followed the recommendations of the LPC, rather than raising the minimum wage "much more dramatically".

"In the context of many rising costs for business, it was important that wages do not become an overbearing burden as businesses seek to invest and grow in the current, improved economic climate," he added.

"Everyone will benefit from this ability further down the line."

Dr Adam Marshall, executive director of policy and external affairs at the British Chambers of Commerce (BCC), responded to the announcement by noting that most businesses agreed on the need for a higher minimum wage.

A recent survey showed that 60 per cent of BCC members favoured a rise in line with inflation, while 14 per cent backed an above-inflation boost to basic pay.

"Companies feel more confident now when it comes to the question of pay, and while the forthcoming increase is perhaps slightly more than they had hoped, it is a reasonable compromise," said Dr Marshall.

The increase in the adult minimum wage to £6.50 an hour could be cause for relief for some small businesses, following reports earlier this year that George Osborne supported a proposal to raise the rate to £7 an hour.

Speaking at the Business Leaders' Forum organised by Food Manufacture in January, David Williams, managing director of Butt Foods, said such a change could lead to additional costs of up to £50,000 a year for his company, leading to job losses and a decline in business at the SME level. 

Does the minimum wage system need to change?

While the government's decision to follow the LPC's latest recommendations was generally well received, there have been suggestions that the minimum wage system is in need of a radical overhaul.

Professor Sir George Bain, founding chair of the Low Pay Commission and the man who set up the basic income benchmark in 1999, told BBC Newsnight that it had become a "blunt instrument", with many employers able to pay their workers much more than minimum wage.

He acknowledged that setting the mandatory minimum at the 'living wage' - about £7.65 an hour - would lead to widespread job losses in areas such as retail and social care.

"But there's only about five sectors where this is true. There's a whole range of sectors where you could easily afford to pay more than the minimum wage," Sir George added.

The Federation of Small Businesses (FSB) has also called for "fundamental reform" of the system, arguing that the way rates are set needs to change to provide greater clarity for companies and workers going forward.

At present, the LPC makes yearly recommendations on changes to the minimum wage but does not offer long-term indications, which results in uncertainty for the UK's 4.9 million businesses, according to the FSB.

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