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Why minimum wage hikes impact profits

Business groups had concerns about the possible effect on job

A report by the Low Pay Commission, which suggests minimum wage rates to the government, has claimed that employment levels have been maintained after a rise in the minimum wage despite businesses raising concerns.

Minimum wage rates

  • National living wage for 25-year-olds and above: £7.83 per hour, increasing to £8.21 per hour in April.
  • Minimum wage for 21- to 24-year-olds: £7.38 per hour, increasing to £7.70 per hour in April.
  • Minimum wage for 18- to 20-year-olds: £5.90 per hour, increasing to £6.15 per hour in April.
  • Minimum wage for 16- to 17-year-olds: £4.20 per hour, increasing to £4.35 per hour in April.
  • Rate for apprentices: £3.70 per hour, increasing to £3.90 per hour in April.
  • Voluntary living wage: £9 per hour, or £10.55 per hour in London.

The effect of increases on business

Economists explain that minimum wages increases may impact unemployment by making employers less likely to hire and more likely to outsource and automate duties previously carried out by low-wage employees. Feeling the effect on their margins, many businesses respond to higher wages by increasing prices; however, higher prices can lead to less revenue and less money to pay employees.

Mike Cherry, the national chairman of the Federation of Small Businesses, noted that amongst those who saw salary bills increase after April’s rise, seven out of ten owners of small businesses decided to lower their profitability and absorb the costs themselves. About 30 per cent scaled-back or dropped plans to invest. Firms have been resigned to smaller profits.

Mr Cherry commented that industries that are labour-intensive and have fine margins – such as hospitality, childcare and retail – will suffer more from increases.

Fears over the minimum wage

When then-chancellor George Osborne announced the national living wage in July 2015, business groups had concerns about the possible effect on jobs; for example, business lobby group CBI called the wage rise a ‘gamble’. In 2017, the Institute for Fiscal Studies remarked that higher minimum wages might eventually cause a reduction in the employment of lower-skilled workers. As no one knows just when this might happen, it deems sudden large raises risky.

The British Retail Consortium (BRC) commented that thousands of jobs could disappear in the hospitality and retail sectors in particular, while the Institute for Fiscal Studies suggested that quick increases to the living wage could lead to jobs being replaced by robots.

Employment success

In its latest report, Low Pay Commission chairman Bryan Sanderson noted that evidence to date reveals that the national living wage has successfully increased pay without causing unemployment; however, employers have had to adapt. He commented that five million workers received a pay rise in April thanks to the national living wage.

The BRC noticed that many employers paid more than this level; however, HMRC identifies hundreds of companies each year that pay below the minimum wage. For the first time in 2017, HMRC unveiled the names in an attempt to name and shame employers, with Debenhams and Argos amongst the culprits.

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