Future paths of the minimum wage: a small business perspective

April 1, 2021

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by Emelia Quist, Senior Policy Manager at the Federation of Small Businesses

The Carnegie UK Trust’s Future of the Minimum Wage project explores how an increased minimum wage can be delivered as part of a wider labour market strategy that promotes good work and tackles in-work poverty. To mark the April 1st 2021 uprating of the minimum wage, we are featuring guest blogs from representatives of workers and businesses discussing the future path of the minimum wage and its implications for businesses, workers, and policy in the COVID-19 context.

 

The Federation of Small Businesses (FSB) has always supported the National Minimum Wage (NMW) and continues to do so provided the level set does not harm employment or business conditions. We believe that the Low Pay Commission (LPC) plays a critical role in setting the wage floor by taking an independent view that reflects on wider economic and labour market changes.

Many small employers recognise the wage floor ought to reflect improvements in the growth of the UK economy and real term increases in average wages. FSB advocated for a gradual age graduation in the National Living Wage (NLW[1]) over a gradual period, with an initial move to 23, after which the LPC should evaluate its impact before a move to 21 is made.

COVID-19 and the impact of the Minimum Wage

 Eleven days after the Coronavirus Job Retention Scheme (CJRS) was announced, on the 1 April 2020, the NLW increased to £8.72, a rise of 6.2 per cent. This increase meant the rate reached the target of 60 per cent of median earnings, originally set by the government in 2015. However, the impact of the pandemic clouded the increase to last year’s rate making it difficult to understand its impact.

In 2019 a significant proportion of small businesses reported an increase in their wage bill, with 40 per cent of businesses reporting that the increase of the NLW did have an impact on their wage bill. The hospitality, retail and manufacturing sectors reported the biggest increases in their wage bill before the pandemic. Hospitality and retail are, of course, two sectors whose ability to operate have been impacted most by the pandemic closures.

More support is needed for small businesses

CJRS was and remains a lifeline to many small businesses and their staff. FSB led the campaign for flexible furlough to help small employers, and many have benefited greatly from the change in the rules. The Job Retention Bonus[2] would have provided welcome cash flow support for businesses.

In 2020, 37 per cent of FSB members stated they had cancelled or scaled down plans for investing in/expanding their business as a means to manage wage costs – this is concerning and highlights the possible medium to long term impact of COVID-19 on small businesses. The problem is further exacerbated by the issue of late payments. The majority of small businesses (62%) have been subject to late or frozen payments in the wake of the COVID-19 outbreak. Small firms in the retail wholesale sector have been hit the hardest with 71 per cent reporting to have suffered from late or frozen payments.

The burden of debt is likely to push many businesses to the brink of closure. However, even at this stage, many can be saved with the right support and guidance. There was little in the Chancellor’s February Budget on job creation and reducing the cost of employment. Cutting Employer’s National Insurance Contributions would play an important role in incentivising retention and recruitment. 78 per cent of small businesses say a cut to Employer NICs would benefit their business as they recover from the pandemic. The Carnegie UK Trust make a similar point in their Future of the Minimum Wage report, recommending that the government temporarily reduces or rebalances employer NICS, in order to deliver on future increases to the minimum wage in the years ahead while minimising the adverse impact on businesses hit hardest by COVID-19.

Beyond the minimum wage

If the UK government is committed to ending low pay, then they also need to tackle the challenges of workplace training and ensure policies are inclusive of small businesses and sole traders. Investing in training is good for workers and businesses, but it can be difficult for small firms that operate under tight profit margins. The UK government’s focus on investing in policies to strengthen technical education, improve lifelong learning, boost basic skills – including digital – and supporting local skills development is welcome news, but more can be done to make these policies more inclusive of small businesses and sole traders, helping them to upskill and satisfy their skills demands.

 

[1] The National Living Wage, not to be confused with the voluntary Living Wage, is the name given to the higher rate of minimum wage paid to people aged over 25. As of April 1st 2021, the National Living Wage rate is being extended to those aged 23 and 24 for the first time.

[2] The Jobs Retention Bonus was intended to provide a financial incentive to employers to keep furloughed employees after the end of furlough; however, given the extension of the CJRS the policy has been rescinded.