Small businesses in the UK are having to sacrifice profits and investment in order to meet the challenge posted by the new National Living Wage (NLW).
Although the majority of small firms already pay employees above the NLW of £7.20 an hour, over half (59%) are absorbing the increased cost through reduced probability, according to new research from the Federation of Small Businesses (FSB).
The new wage was introduced in April this year, and since then small business have demonstrated their resilience to paying their staff correctly. However, a quarterly business survey by FSB revealed that 47% of small businesses now cite wages as the main contributor to the rising cost of doing business.
The 2016 Q2 Small Business Index also found some Small and Medium-sized Enterprises (SMEs) have had to take other forms of action to stay afloat, such as increasing their prices (35%), reducing staff hours (24%), cutting investment (23%), and recruiting fewer workers (16%). Some businesses also sought to meet the increased cost through improved efficiency (13%).
Nearly a third of businesses (32%) said the new wage has led to some increase in their wage costs and further one in five (19%) said labour costs went up significantly as a result of the new wage.
Mike Cherry, national chairman of FSB, 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”.
FSB is calling for the Low Pay Commission to be given flexibility on how to meet the Government’s NLW target of 60% median earnings by 2020. This target should be adjusted if it becomes clear the economy cannot bear the rapid pace of NLW increases, said the federation.
The NLW is currently projected to rise by £1.85 per hour over the next four years, reaching £9.05 by 2020.
The sectors most effected by the wage increase were those with tight margins and where low wages are most common, such as businesses in the wholesale and retail sector and those working in accommodation and food services.
In addition, the FSB forecast businesses in Yorkshire, the West Midlands, Wales and the South West are among the most likely to cite a negative impact before the NLW was introduced.
Mr Cherry added: “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”.