The small business community has reacted to the National Living Wage by absorbing costs or raising prices but how will they cope as the expense continues to creep up?
When the new National Living Wage – which meant companies had to pay all workers aged 25 or over at least £7.20 – was introduced in April this year, many small businesses took it in their stride. But it seems that, despite this, a majority of SMEs have still seen a negative impact on their profit margins since the wage became law.
According to new research from the Federation of Small Businesses (FSB), 59% of small businesses have ended up absorbing the extra costs introduced by the National Living Wage. The sectors feeling the most pain have been those that have tighter margins and rely on employees who had previously been on lower pay grades, such as retail and hospitality. Not everyone was happy to take a hit on profits though. The FSB has found that 35% of small businesses have responded by raising prices, 24% reducing staff hours, 16% recruiting fewer people and 13% seeking out increased efficiencies.
While Brexit has been hogging the headlines, it seems labour costs as a result of the new legislation have had a bigger impact on expenses, with 47% of small businesses citing wages as the main contributor to the rising cost of doing business.
And the burden is set to get bigger. The National Living Wage is projected to rise by £1.85 per hour over the next four years, reaching £9.05 by 2020. In anticipation of this, the FSB is calling for the Low Pay Commission to be given a degree of flexibility in implementing the government’s target, especially if it becomes clear the economy can’t cope with the pace of labour cost rises. As things stand, 19% of businesses have already reported a significant increase in labour costs, while 32% have experienced some increase.
Mike Cherry, national chairman at the FSB, has also stated that the targets were “set in a ‘pre-Brexit-decision’ economy”. He continued: “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.”
While the small business community has shown that it's able to cope with the new rate, is a rethink of future hikes needed in this post-Brexit world?