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Kate Phelon

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Minimum wage, maximum impact? By Dan Martin


As another rise in the national minimum wage takes hold this week, HRZone business editor Dan Martin asks members of sister site AccountingWEB whether it is having too negative an effect on businesses.

The national minimum wage (NMW) first hit the headlines when the Labour party included it as a pledge in its manifesto for the 1997 general election. Following Tony Blair’s victory which brought an end to the Conservatives’ 18 year reign in Number 10, the party appointed members of the new Low Pay Commission to investigate at what levels the minimum wage should be set.

On 1 April 1999, in the words of the D:Ream hit used by Labour for its 1997 election campaign, things got better for the low paid when the national minimum wage was introduced. Adult workers aged over 22 years old became entitled to £3.60 an hour, while the rate for workers between 18 and 21 was set at £3.00.

The Low Pay Commission said the initial rates reflected its “deliberately cautious approach” and benefited one million low-paid workers with “no adverse effects on employment or inflation”. Since 1999, rates have been increased annually, rising in line with average earnings until 2002. However, in March 2003, the commission proposed raising rates faster than average earnings because it believed fewer people than originally intended were benefiting. As a result, the adult level increased from £4.20 to £4.50 on 1 October 2003. There has been successive above average earnings hikes ever since, while a new rate for 16 and 17 year old workers was introduced in 2004. This year’s rise occured on 1 October when the adult minimum increased to £5.35 an hour.

Ever since the NMW was introduced employers’ groups have argued that economic pressures mean minimum wage increases should be reduced or delayed. Organisations, particularly those representing small businesses, have claimed many of their members have been forced to reduce staff numbers or raise prices for customers products and services as a direct result of minimum wage increases.

Not all firms comply with the rules and HM Revenue & Customs (HMRC) set up a network of investigators to deal with the regulation flouters. Earlier this month, the government department published a list of excuses used by employers for not paying workers the minimum allowable wage. Among them were “he’s disabled”, “she only wanted £3 an hour” and “he’s not worth it”. Of course such outrageous excuses for keeping an employee’s pay illegally low cannot be condoned but do the excuses reveal something else? Are business groups’ claims about the adverse effects of the legislation indeed true and is it a having a damaging effect on firms’ operations? If so, is it time for an enquiry into the level at which the rates rise and reform of the system? Even if this is the case however, the issue still remains of how does the government continue to balance ensuring that workers receive fair pay with keeping business costs down? We put those questions to AccountingWEB members.

Negative impact

If some members’ comments are anything to go by it appears that to some extent claims of adverse effects resulting from the minimum wage by business groups are indeed true. Several AccountingWEB members reported that their company operations have been hit, particularly in terms of staff costs.

The Low Pay Commission is regularly commissioned by the government to investigate the effects of NMW and although successive reports have concluded that businesses are generally not adversely affected by the NMW, its 2004 study quoted research which found two thirds of nurseries had been forced to raise client fees as a result of the increased minimum wage costs implemented in October 2003. Several respondents mentioned that the increase in fees had led to a drop in the number of children in their nursery and some said that they were concerned about the knock on effect this could have on staffing.

Philip Allen said he has personal experience of the problems hitting the pre-school care industry. “Existing regulations lay down what capital investments shall be made in a nursery school, what the staffing ratios shall be, and (earlier this year) how much the government is prepared to pay school places,” he said. “I have yet to find a nursery school that can meet all these requirements and still pay the NMW.”

Manufacturing firm director Robert Milliken was one AccountingWEB business member whose staff costs have increased. He claimed that as each time the minimum wage increases, employees on higher rates of pay demand the same percentage hike. “This has led us to reduce the staff from over 120 to less than 70 over the past 3 years, as we move their jobs to the Far East,” he said. “Keep raising the NMW and keep losing jobs. I have to be competitive to stay in business to be able to employ anyone!”

Other respondents complained that customer and client charges have had to rise as a result of wage increases. Residential care home director Mark Smith said the annual rises cause his organisation “great pain” because the rate local authorities pay for care always increases at a lower rate than the NMW. “To cover the pressure of increased staff costs we have been forced to charge private residents more than local authority residents,” he said. “I know that perhaps this seems unfair but it is not of the home’s making. We are forced to make decisions like this a result of government policy.”

Another member who has suffered at the hands of the minimum wage is Mike Evans, owner of AAM Business Advisors, based in the Scottish Highlands. “I am very conscious that my costs need to be controlled and any increase in the minimum wage has a knock on effect on all labour rates,” he said. “This means as a self employed person my own income naturally down the same way.”

National Insurance

For many of members venting their opinion on this issue, National Insurance (NI) ranked highly in their list of concerns.

‘Steven’ was the first to raise it as issue saying: “The nasty effect of the NMW is that the NI bill goes up as well and this will certainly be reflected in the total salary budget.” NI was also a worry for Andrew Meeson, director of West Midlands-based chartered tax advisors Spencer Bradley Meeson. He said that while the fact that increased NI costs which make the increases in wages “relatively worthless”, the real problem is that the personal NI and tax thresholds are set “ridiculously low with the absurd result that someone on NMW is a taxpayer”. “Unless and until the personal allowance and NI threshold are increased to bring the lowest earners out of the scope of taxation, any increases in the minimum will be more effective at soothing MPs’ consciences than at benefiting the low-paid.”

Consultant Roland Boorman believed that the real intention behind the minimum wage is to “increase tax revenues”. Calling it “yet another spin on stealth taxes” he said: “Raising the minimum wage without changing the thresholds acts to the detriment of both the business and the lower wage earner. The Revenue clearly wins since their income is out of the business cost structure.”

Lisa Sheppard, from West Yorkshire-based Paragon Business Services, said some employers, particularly those running small businesses, should pay attention to the impact of the latest wage rises. “The increase in the NMW now pushes someone working 16 hours a week over the LEL for NI. This means the employer will need to register for PAYE, complete P11s, pay statutory sick pay, statutory maternity pay etc and complete an annual return. Yet more paperwork!” She warned that any employer who realises late “will incur the wrath of HMRC when they register late next April!”


Some of our members went so far as to say that the minimum wage should be entirely abolished. Angus Macmillan was one. “I think it should be abolished because it is a fixed component in a free society,” he said. “The wage level should be on the value an individual has to a business and it should be a matter for agreement between employer and employee. Government should not be involved.”

Two members made the interesting point that the minimum wage actually excludes certain members of society from the employment process. John Attfield said: “My 19 year old son has mild learning difficulties and simply isn’t worth £5.35 an hour. Consequently, having left school three years ago, and having applied for numerous low-paid jobs, has never worked. Government legislation is keeping him out of work!”

Making a similar point was Stephen Phillips who said: “Prior to the minimum wage we employed someone whose abilities and work output were limited. We did not pay her a lot; but what we did pay was more than fair for what she produced. Coming to work gave purpose to her day; and probably provided her only companionship. Before the minimum wage was introduced, she became ill and had to stop working. We would no longer be able to accommodate someone like her.”

Minimum wage backers

For all those members who hit out against the minimum wage, it must be acknowledged that there were several who backed it. Eric Chantelle, accounts assistant at MF Wells Hotel, said employers must remember the benefits that well-paid employees bring. “It’s surprising how many employers forget about the importance and value of having happy motivated staff,” he said. “The benefits to a business can be great, resulting in increased productivity, lower levels of absence, increased sales and a much improved working environment for everyone, including the employer.”

Jason Holden, from accountancy firm Holden Associates, meanwhile argued that none of his clients have been adversely affected by the NMW. He hit out at critics of the legislation saying that those who claim it will put small companies out of business “cannot be viable [businesses] in the first place, in which case lets hope they are replaced by someone who can set up and run a viable business.” “The NMW is needed in a country such as the UK where everything costs so much,” he said. “It also helps deal with employers who would go back to the days of Dickens if they could.”

Neil Wilson agreed only non-viable businesses can be affected badly. “Everyone is affected by the NMW in the same way,” he said. “You push the price increase onto your customer. The customer has nowhere else to go because everybody else supplying the same service is affected by the increase. That’s economics for you.”

The future

Last month, British Retail Consortium director general Kevin Hawkins wrote a letter to Paul Myners, the new chairman of the Low Pay Commission (LPC), in which he said the term ‘review’ in the commission’s new terms of reference gives it the freedom to carry out a wide-ranging evaluation of the long-term goals of the NMW. Admittedly, business groups have been saying similar things for a long time, pretty much most of the seven years that the minimum wage has been in force. Successive annual reports from the Low Pay Commission have concluded that overall businesses have suffered little from the annual wage increases but if the comments of AccountingWEB members are anything to go by there are at least some firms in the UK where the negatives outweigh the positives. All legitimate business owners of course want to ensure their employees receive fair pay but it is clear that if more UK businesses are to achieve successful growth, issues such as raising the national insurance and tax thresholds are things the Low Pay Commission and in turn the government need to seriously consider.

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Kate Phelon

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