SMEs react to living wage rise by cutting hours and rethinking hiring

Small business chiefs have warned of the risk of job losses after research revealed some SMEs have cut staff hours since the introduction of the national living wage (NLW).

The Federation of Small Businesses (FSB) found that the recently introduced higher minimum wage for people aged 25 and over had caused wage bills to rise at more than half of the 641 firms it polled this summer.

The NLW of £7.20 per hour came into force earlier this year, with the government planning further rises that would take it to £9 per hour by 2020.

One in four of those employers with higher labour costs had reduced staff hours since the NLW came into effect in April, according to the FSB survey. Recruitment activity was down at about one in six, and profit had dropped at six in 10.

The FSB called for the £9 target to be adjusted if necessary to avoid job losses. Its national chairman, Mike Cherry, said: “Small employers have stretched to meet the challenge set by the NLW, 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,” he added.

Just 13 per cent of firms who said their wage bill had risen since April had sought to meet the increased cost through improved efficiency. The majority (59%) had absorbed the cost by taking lower profits.

The CIPD said the FSB findings reflected its own research, which found that smaller firms were more likely than big companies to have suffered profit cuts as a result of the NLW – and less likely to have boosted efficiency.

CIPD performance and reward adviser Charles Cotton described the situation as “concerning” and called for a coordinated attempt to help small businesses boost productivity.

“SMEs can’t pay for future increases to the national living wage by taking lower profits, nor is a slash and burn approach to employee rewards a viable long-term approach,” he said.

“The only sustainable way to pay for the national living wage is through increased productivity, yet many SMEs simply don’t know how to raise their game. We need to see a government business strategy dedicated to helping SMEs improve their productivity.”

Cotton added that the Low Pay Commission should take a “more cautious” approach to increasing the NLW. “The original suggested level for the NLW of £9 an hour by 2020 was always likely to be ambitious,” he said.

A spokesperson for the Department for Business, Energy and Industrial Strategy said the government was committed to building an economy that worked for all.

“A key part of this is ensuring that the NLW works for both hard-working employees as well as businesses of all sizes, and we will continue to back small firms to grow and create jobs by providing an environment in which they can thrive.”