Chancellor George Osborne’s budget announcement of a ‘living wage’ of £7.20 per hour is likely to have significant impacts on low paid workers. But the effects of the new wage may not be the ones that those workers were hoping for. The chancellor’s simultaneous announcement of cuts in tax credits and other welfare benefits means that – all other things being equal – low paid workers are unlikely to be any better off under the new regime.
But the significant aspect of that caveat is that ‘all other things’ are not going to be unaffected. Obliging employers to pay more for their labour will have a series of knock on effects, and these go well beyond the knee-jerk reaction that they are going to enjoy reduced profits.
The basic rule of all business is that all costs are covered by the revenues received from customers. In other words, obliging employers to pay more for their labour will, inevitably, mean that customers have to pay more for the goods and services they buy. If those customers are amongst the lowest paid in the economy, they will inevitably buy less. And customers buying less is a recipe for business failure.
More significantly for the chancellor is the fact that the small and medium-sized businesses that form the backbone of the British economy are going to have to find the additional funds to pay the increased living wage. Since those jobs are – by definition – low value jobs it will be obvious that they do not add the sort of value that necessarily allows for the absorption of extra costs. In other words, a rise in the living wage will not leave ‘all things equal’.
Something will have to give and, whilst price rises is one likely outcome, the potentially more damaging one is that some firms will have to lay off staff or risk closure.
This resourceful post from Hiscox shows graphically just how important those smaller businesses are to the UK economy. What is more, it also shows the degree to which different regions are reliant on SMEs. For example, across Yorkshire, Humber and the North West, 100% business turnover in the information and technology sectors is entirely reliant on SMEs. Unlike largescale providers such as Ikea – who have recently announced wage rises for their lowest paid staff – SMEs often lead financially precarious lives.
Mr Osborne is confident that his initiative will be accommodated by UK businesses, and the evidence of the previous minimum wage – introduced at £6.50 per hour – suggests that it will be. But the chancellor’s grand overview of the total figures will blind him to the small scale consequences of the new minimum/living wage. Some SMEs will inevitably have to lay off staff or switch their employees to part-time hours or ‘flexible’ short-term contracts. For those workers, Mr Osborne’s budget will constitute bad news. Other SMEs already operating at the limit of their capacity will go out of business.
This creative destruction may serve the chancellor’s overall strategic economic and political objectives, and it may give the UK economy a much needed inflationary boost, but in the margins, and amongst the constituency of people directly affected by the new living wage – and the attached welfare cuts – there will be a price to pay.