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National Minimum Wage Rise: What would the Three Bears say?

Discussions about the National Minimum Wage have been in the news again recently. The growth in the economy means that Britain can now afford a higher increase in the NMW. The Chancellor supports a proposal to increase the hourly rate from £6.31 to £7 an hour and as always, the different responses have been vigorously expounded. An analogy with the Three Bears comes to mind ….. Some say the rise is too much, some say too little, and others say it is just right! Nearly 1.4 million people receive the minimum wage, so a large number of individuals and companies (particularly in the wholesale/retail and hotel/restaurant sectors) will be affected.

Too Much!

For some businesses, a rise from £6.31 to £7 is simply too much. The cost of employing people is very high and the auto-enrollment requirements will increase that still further. Big companies buy on price and can drive process right down so that margins are very tight. Last year I was speaking to one woman who ran a laundry. She told me that the percentage profit from the hotels that had placed a contract with her was tiny. If she paid above the NMW there would be no profit. If she tried to raise the price, they simply go elsewhere. Sometimes the NMW reflects commercial reality.

The argument runs that with the economy still getting back on its feet, this type of rise might well be precipitate. Surely it would be better to have people employed on lower salaries than none at all. An increase to £7 would be an 11% rise compared with only 2% inflation. Some would say a more moderate 6 or 7% rise would give companies a better chance to react without severely endangering the cost of living.

For argument’s sake, let us say an employee works on minimum wage for 40 hours a week all year and therefore currently earns £13,124.80. On the new £7 rate, they would earn £14,560. That means the employer suddenly has to pay each employee an extra £1,435.20 per year. If we say the company employs eight people on this basis, their wage bill would go up by £11,481.60 per year. If the rise was just 6%, the rise would be £790.40 per employee per year.

The CBI has not directly criticised the plan, but has pointed out that “an unaffordable rise would end up costing jobs and hit smaller businesses in particular. Any increase in wages must reflect improved productivity.” Hardly a remarkable statement, but has the merit of being true.

Too Little!

For the Trade Unions, the rise is far too little! Anything that the Government ever does always is too little, so their comments come as no surprise. I always question if they would take this view if they were making the payment from their own pockets. I suspect not. The voluntary living wage of £8.80 in London and £7.65 elsewhere would be nice, but it does not necessarily reflect the lot of smaller businesses that may struggle now or find themselves struggling when an employee has to be covered for whilst on maternity leave, sick leave or Military Reservist service. Paying for a cover may be difficult enough without the cost going up further. Again, better to have a slightly lower paying job than none at all.

Some have suggested that if the living wage is unrealistic, the minimum wage should still vary by economic region.

Just Right!

And then we have baby bear aka David Cameron. For him and many around him (Iain Duncan Smith MP and Sajid Javid MP in particular) this is the evidence he needs near an election to show that his plan is working. The CBI has not yet chastised him for crippling business, and the Unions have only so far been able to groan that their new toy is not quite as big and expensive as they wanted. And crucially the rise, combined with inflation hitting its low 2% target, helps him to neutralise at a critical time the one dangerous weapon in Ed Miliband’s arsenal – the cost of living crisis for low-earners and the middle classes. It is not gone, but it is clearly being addressed.

Next Steps

For those concerned by what a rise to £7 per hour might mean, now is the time to act. The Low Pay Commission is due to report back next month on how much rates should rise, if at all, after taking advice from the Treasury.

The CIPD is asking for advice from its members before lobbying the government about the rise that would likely be implemented in October.

Feedback is invited and it should be as impartial as possible to remove the perception that all businesses naturally want to selfishly restrict minimum wage (most employers pay more, but that’s not an argument it can be afforded by everyone). When lobbying the government, any message must be tailored to what the politicians want to achieve as well as what your business wants to achieve. If an 11% rise is unmanageable, what about a 6 or 7% rise? Combine the potential effects on your business with the effects on the nation and link it to the aim of creating long-term private sector employment.

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