Bosses Can’t Pay Less Than Workers, FSB Warns

Rising employment costs are forcing thousands of owner-managers to foot the bill, squeezing profits, pensions and rents alike.

Rising employment costs and rising low-level inflation have left many small businesses unable to make ends meet, one of the country’s leading business groups has warned.

The Federation of Small Businesses (FSB) has warned that thousands of owner-managers are being hit with high costs and dwindling profits that are jeopardizing their ability to earn even a basic income from their companies.

In a submission to the Minimum Pay Commission (LPC), an independent body that advises ministers on minimum wages, the FSB said managers are increasingly being forced to pay rising fees and compliance costs out of their own pockets. Stress, it was argued, is becoming a permanent feature of the labor market, forcing many owners to close their doors or make decisions that will harm their retirement.

“It is becoming a major structural problem for small businesses where the cost of employment, including the national wage, National Insurance employer contributions and auto-enrolment, makes it difficult for a small entrepreneur to make enough profit to pay a living wage, let alone support a pension,” said the presentation.

“This has a double negative effect: fewer roles are created and kept in small businesses, but also small businesses are economically efficient. In fact, this leads to fewer jobs and fewer small firms.”

The warning is in line with recent FSB survey data, which showed rising wage costs are dragging small business confidence into negative territory as labor becomes the single biggest barrier to growth. The union said that only 11% of its members will not be affected by the increase in the inflation rate.

The National Wage currently requires workers aged 21 and over to be paid £12.71 an hour, while those aged 18 to 20 should earn £10.85. The LPC signaled in March that it was prepared to recommend a national wage increase of up to 5% by 2027, with an average of £13.18 representing an increase in inflation of more than 3.7 per cent.

The FSB was not alone in sounding the alarm. The Institute of Directors (IoD) used its own submission to urge the LPC to direct the Government to reconsider Labour’s manifesto promise to pay all workers, regardless of age, the same minimum wage. He blamed the recent rise in youth unemployment on policies that prevented employers from hiring unskilled workers.

“If the Government is serious about dealing with the problem of youth employment, it must deal with the problem of youth employment costs,” warned the IoD.

The center said Labour’s promise to end youth unemployment at the grassroots level risked making the situation worse, and called on ministers to delay further increases until youth employment returns to pre-pandemic levels. The minimum wage for young workers has risen by more than a quarter under Labour, a move economists, including Bank of England policymakers, say has deepened the youth unemployment crisis which has seen the number of young people not in education, employment or training top one million.

A study by the Recruitment and Employment Confederation found that a quarter of employers would reduce hiring if wages rose to the levels discussed, which it said points to a “potential tipping point in employment decisions”.

“These dynamics have tangible consequences for the labor market,” he said. “Entrance opportunities are under pressure, working hours are being reduced in some sectors, and the impact is disproportionately on young people and those entering the labor market, especially those who are already at risk of getting or not learning, employment or training.”

The IoD has urged Labor to move away from a scheme that pays employers up to £3,000 to take on young people who have lost their jobs, and instead look to wider measures aimed at reducing overall employment costs. “Small compensations, coupled with a large number of managers will not come close to eliminating the increased recruitment costs brought about by the Government’s recent employment policy,” he said.

Low minimum wage rates for young workers have existed since the scheme was introduced by Labor in 1999. The IoD pressed the LPC and the Government to reconsider plans to end what it described as “discriminatory” age groups until under-24 employment rises back above the 60 per cent level seen before the closure.

“The LPC should recommend that the Government slow down the implementation of youth equity and minimum wage levels,” he said. “As explained above, equality has a negative impact on youth employment opportunities at a time when the number of Neets is over one million.” The concern comes with broader forecasts that youth unemployment could rise to 17.8 percent by 2027 as artificial intelligence and tax increases interfere with entry-level employment.

Meanwhile, the FSB has called on Labor to automatically increase the small business tax break linked to future minimum wage increases, ensuring that firms with fewer than four employees are left even worse off.

A government spokesman said the increase in minimum and living wages left Britain’s lowest earners £900 better off.