Small businesses struggle to meet the living wage

Research from the Federation of Small Business has found that small firms are having to raise prices, reduce staff working hours and cut investment to account for the new National Living Wage rise increase.

The Q2 Small Business Index reveals that 47 percent of small businesses cite wages as the main contributor to the rising cost of doing business, with 59 percent stating that they are absorbing the new wage increases by taking lower profits.

About a third (32 percent) said the new wage had led to some increases in their wage costs, and a further one in five (19 percent) added that labour costs went up significantly as a result of the new wage, which stands at 7.20 pounds an hour.

Of the businesses that report increasing labour costs from the National Living Wage, the majority of them, 59 percent absorbed the increased cost through reduced profitability. However, some firms have had to increase their prices (35 percent), reducing staff hours (24 percent), cutting investment (23 percent), and recruiting fewer workers (16 percent). Some businesses also sought to meet the increased cost through improved efficiency (13 percent).

The Federation of Small Business is calling for the Low Pay Commission to be given flexibility on how to meet the Government’s National Living Wage target of 60 percent median earnings by 2020. Wanting the target to be adjusted if it becomes clear the economy can’t bear the rapid pace of wage increases, which is currently projected to rise by 1.85 pounds per hour over the next four years, reaching 9.05 pounds by 2020.

National chairman of the Federation of Small Business Mike Cherry said: “Small employers have stretched to meet the challenge set by the National Living Wage, with many paying their staff more by reducing operating margins. This will get harder for many firms in later years, with the targets set in a ‘pre-Brexit-decision’ economy.

“Considering the uncertain economic climate, the Low Pay Commission must be given the opportunity to adapt the target in future years so that it can be met without job losses or harming job creation. The rate of the National Living Wage should be set at a level the economy can afford, based upon economic and not political priorities.”