In his budget in July, George Osborne announced that, from April next year, the National Minimum Wage would rise to £7.20 an hour for over-25s, and that by 2020 he intended to raise it to a “National Living Wage” of £9 an hour. Some accused him of stealing Labour’s clothes, but there can be no doubt that this represented a major commitment to raising the living standards of poorer workers.
A large number of employers have spoken out against this, claiming it will damage their business, and Tim Martin of Wetherspoons has lent his weight to their campaign. Obviously it will increase the costs of labour-intensive businesses, such as any in the catering sector, but arguably across the whole economy it will be beneficial. I’ve not so far seen any beer bloggers raise this issue.
I’m not trying to start a general debate on the merits of minimum wage policies but, as with other things such as minimum alcohol pricing, the issue is not so much the principle as the level at which it is set. Some people seem to think that an increase in the minimum wage is in effect conjuring money out of nothing, but in reality it would be a transfer of resources from one group to another, and someone would have to bear the cost. This would be a mixture of:
- Customers, through higher prices
- Employees, through reduced hours, job losses and restriction of fringe benefits
- Business owners, through reduction of profits and dividends
If a company is large enough, it will have the flexibility to make choices over where the costs of the minimum wage will be met. And although big businesses may squeal — or wish they could in the case of many large retailers, who bemoan the change in private but fear speaking out publicly lest they alienate customers — it is small businesses that have a much more legitimate gripe.It is sometimes argued that the increased costs of a National Living Wage will be redistributed through the economy, and thus stimulate demand. However, the costs will be mostly borne by labour-intensive businesses such as pubs, whereas the benefits will be spread across the board.
After all, among people who work at large companies, fewer than 4 per cent are paid the minimum wage; at businesses employing fewer than 50 people the figure is more than one-third. The national living wage is targeted to be worth 60 per cent of the UK median by 2020. But, if you look only at people employed by “micro” businesses that have fewer than 10 workers, even the current minimum wage of £6.50 an hour already meets that objective. For these companies, the new £7.20 figure looks particularly out of whack.
Small businesses have less than a year between the announcement of the NLW and its implementation. And that is not the only new financial and administrative burden with which they are grappling. The summer budget included a change in the tax on dividends, which will hit small business owners. So will their obligation to enrol all workers into a pension scheme, unless they opt out. Small business owners argue persuasively that the NLW will force them to cut jobs and even push some into bankruptcy.
It is also claimed that the current minimum wage is set at a level some way below that of a “living wage” which allows someone to live independently. Well, people have always had to make their first steps into the job market when living at home or sharing houses. It’s also not widely appreciated that many minimum wage earners are second earners in a household, or people such as the partially retired who already have another source of income. For people in that position, earning £6 an hour for 16 hours a week in an undemanding job may be an entirely rational decision. It’s estimated that well over half the benefits of an increased minimum wage would accrue to households in the top half of income distribution.
As I said, it may well be that raising the minimum wage brings benefits across the whole economy. But it can’t be denied that it would have a detrimental effect on labour-intensive businesses such as pubs. It’s not a pain-free policy. There must be some way that Osborne could relax or delay it to help small businesses.