Martin Flanagan: Living wage justified despite firms' fears

The problem with the national living wage introduced by the Tory government in April after being trailed the year before by George Osborne is not that most businesses can't afford it. They can.

Employers' concerns over the living wage are understandable, says Martin Flanagan. Picture: John Devlin
Employers' concerns over the living wage are understandable, says Martin Flanagan. Picture: John Devlin

The problem is that the businesses which can’t afford it the most – mainly a slice of the small and medium-sized sector – are hurt disproportionately. And their recourse is to cut recruitment, staff hours, benefits and general pay growth.

That is borne out by a survey published today by the British Chambers of Commerce (BCC) in conjunction with Middlesex University.

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The survey contacted 1,600 business leaders across the UK in August. Two-thirds of them said their businesses were unaffected by the change because they already paid their employees above the NLW, available to people aged over 25.

But a quarter of affected firms have already reduced recruitment in response. And more than a third say they plan to do so if the living wage rises to £9 an hour as scheduled by 2020.

The concerns are understandable. Many more start-ups and smaller firms fail than established businesses. The latter have the ballast in tough economic times to weather extras on their cost bills.

It may thin out profits at the big boys, and they may bleat, but they get on with it. For smaller outfits, however, the likes of extra pay costs, business rates, apprenticeship levies etc can be the difference, particularly when taken cumulatively.

This does not mean the living wage is a bad idea. I think in terms of social cohesiveness – in both austere and more benign times – it is a very good one. But that doesn’t mean pragmatism should go entirely out the window, as the BCC suggests.

The trade body says the living wage should not be a political piety, but should be underpinned by an “evidence-based” approach when setting it.

That should embrace the state of the economy, the other pressures businesses are facing at any given time, including the likes of high deflation, high input costs etc.

On balance, though, today’s survey does little to suggest that the Conservatives – who stole Labour’s clothing rather effectively on the issue – had it wrong.

The figures show some business pain – and repercussions – at the margins. But not at dramatic levels.