Businesses taking lower profits as wages rise

New research from the Federation of Small Businesses (FSB) found small firms are meeting the challenge posed by the new National Living Wage (NLW) with the majority (59 per cent) absorbing the costs by taking lower profits.


Following the introduction of the new wage in April 2016, small businesses have demonstrated their resilience in meeting this challenge, but some businesses have struggled to do so. FSB’s 2016 Q2 Small Business Index, our quarterly business survey, found that 47 per cent of small businesses now cite wages as the main contributor to the rising cost of doing business.

A recent Horticulture Week survey found that 71 per cent of growers and 59 per cent of garden centres are planning to raise prices, because of worse exchange rates, higher wage costs and other factors.

FSB is calling for the Low Pay Commission to be given flexibility on how to meet the Government’s NLW target of 60 per cent median earnings by 2020. FSB wants this target to be adjusted if it becomes clear the economy cannot bear the rapid pace of NLW increases. The NLW is currently projected to rise by £1.85 per hour over the next four years, reaching £9.05 by 2020.

FSB research found that the majority of small business were already paying all their staff above the new NLW of £7.20 an hour. However, despite this, about a third of businesses (32 per cent) said the new wage has led to some increase in their wage costs and further one in five (19 per cent) said labour costs went up significantly as a result of the new wage.

Of the businesses that report increasing labour costs from the NLW, the majority of them (59 per cent) absorbed the increased cost through reduced profitability. However, some firms have had to take other action in order to stay afloat, such as increasing their prices (35 per cent), reducing staff hours (24 per cent), cutting investment (23 per cent), and recruiting fewer workers (16 per cent). Some businesses also sought to meet the increased cost through improved efficiency (13 per cent).


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