What is the Price of the Cost of Living?

Posted: 12th Apr 2016

by Rory McGimpsey

Much has been made about the introduction of the so-called “Living Wage”. The change (which came into effect on 1 April 2016) sees employees over 25 earning a basic minimum income of £7.20 per hour, a figure that’s expected to increase every year until 2020. The headlines surrounding the initiative are rather misleading, the new rates are not so much a Living Wage as a significant increase in the National Minimum Wage. In fact, the new rate is less than in the internationally recognised “Living Wage” level. While most employees are rarely satisfied with the level they’re earning, this increase is actually quite healthy, making the UK Minimum Wage one of the highest of developed economies, according to the FT.

With the economy still navigating its way out of a lengthy and brutal recession, the succour provided by this increase is difficult to dismiss. However, while the introduction of an enhanced Minimum Wage has been welcomed by consumer groups and charities alike, there has been concern over the impact the increase will have on businesses. The “Living Wage” affects every business in the country, but while larger corporations have more capacity to adapt to such changes (albeit they’ll still feel the pinch), the effect on small business is causing greater concern.

The Guardian quotes John Allan, chairman of the Federation of Small Businesses as stating: “The FSB has been supportive of gradual increases in the national minimum wage in recent years, to reflect the improvement in the economy and the fact that more of our members are raising wages. However, the introduction of a new, significantly higher rate (the national living wage) – 70p more than the existing adult rate – will pose big challenges for many small firms, particularly those in the hospitality, retail and social care sectors where low pay is common and margins tight. Companies in contract service sectors, that are already locked into long-term contracts, will also be negatively affected – given the short time in which to adapt.”

The reaction of small business leaders is indicative of a concern that the “Living Wage” could precipitate the collapse of businesses throughout the country. While such a statement seems melodramatic, it reflects a genuine worry. The Guardian quotes Neil Carberry, director of employment and skills at the CBI as arguing: “This will also affect companies providing services to the public sector. Like any other business, they may not be able to sustain enforced wage rises and continue to provide the quality and scope of services, and might therefore need to enter into renegotiation with the government.” According to the FT, the Office for Budget Responsibility has estimated that extra costs incurred by employers could lead to approximately 60,000 job losses.

While the rise in Minimum Wage will unquestionably prove challenging for many small businesses, it can be argued that the effects are offset by the legion of benefits the increase will confer in employees, particularly those on extremely low incomes. According to www.gov.uk “More than 70% of workers have said they will feel more positive for themselves and their families as a result of the introduction of the new National Living Wage, announced by the Chancellor at the Summer Budget. The findings are part of a new government survey which also shows that 59% of respondents will feel more motivated at work as a result of the increase in their pay packets.”

Such diverse opinions demonstrate the complex, and often conflicting priorities that have to be balanced in the attempt to stimulate a growing, productive economy. With the economic outlook as positive as its been for several years, challenges nevertheless remain, and growth forecasts must always be viewed in that context. While the living conditions of those on low incomes is concerning, measures to alleviate the effects of inflation must be balanced with the need to support business-it is employers after all who deliver much coveted economic growth. Therefore, although many will celebrate the increase in Minimum Wage and the comfort this will undoubtedly provide to millions of employees, it is naïve to think that such improvements won’t come at a cost.

← Back to Blog