Is it time for a wage increase?

The latest revision of GDP suggests we came out of recession nine months earlier than previously thought, in the third quarter of 2013. Since then, growth in the economy has been positive, though slow. Businesses are growing in confidence and whilst in the main they are limiting their growth ambitions to domestic, not international sales, that optimism should mean even better growth over the coming years.

The political narrative is not switching towards wage growth, which has lagged behind inflation. Official figures reveal that excluding bonuses, wage growth grew by 0.6 per cent, well below inflation. This puts more credence to the ‘cost of living’ debate, though it remains the case that measures to mitigate the impact of less valuable incomes shouldn’t be found by putting further costs on businesses.

So why are wage rises stalling? Here are some theories.

Rather than increase wages, businesses have chosen to employ more staff. Unemployment is down to less than 7 per cent and whilst youth unemployment remains a significant issue, the overall levels of employment – and self employment – are extremely encouraging. In particular, the rapid rise in self-employment is likely to lead to lower average wages, given the time and personal investment it often takes to get new ventures of the ground.

The recovery remains fragile and businesses are hedging their bets. Growth is sluggish and businesses are yet to be making the kind of profits to justify a dramatic rise in wages. Aligned to this is the fact that many are having to make investments they have put off during the recession, for instance in new vehicles, machinery or buildings. That takes a huge chunk of finances and wages are being left to stagnate a little as a result. Should there be further issues that cause the economy to go back into recession, higher wages introduced now could be unaffordable a little further down the line. Given the imminent increases expected in interest rate levels, businesses will also have one eye on any debt costs they have over the coming years.

External costs of doing business remain high and continue to rise, meaning wages can’t yet be substantially increased. Forum research backs this argument. Our annual ‘Cost of Doing Business’ survey has shown repeatedly that businesses have tried to absorb cost rises rather than pass them on to their customers. The Forum’s 2013 survey revealed over 90% of members have seen an overall increase in their costs and at 6.0%, prices have risen far faster for micro, small and medium-sized employers than for the rest of UK society. As a result, wage growth has suffered.

Perhaps the truth lies in a combination of all three. What is certain is that the issue of wage growth isn’t likely to resolve itself in the short term, certainly within the smaller end of businesses. That’s because many are anticipating the impact of auto-enrolling their staff into pension schemes for the first time. Whilst it will be illegal to present employees with an ‘either or’ scenario, that’s to say, either have a wage rise or receive a pension, it is highly likely that businesses would not choose to implement both, especially if they are still uncertain about their growth over the coming years.

To put the impact of wages in context, take the current argument that businesses should be striving towards a Living Wage. Raising the National Minimum Wage to a Living Wage isn’t just an increase of £1.34 an hour. It is an increase in employer and employee national insurance, an increase in pension contributions and an increase in the cost of other employment benefits. For a typical micro business employing nine full time members of staff that’s an increase of £23,500 a year (£43,700 for London businesses), before the additional impact on NI, pensions and employee benefits are taken into account.

That’s a huge cost increase and underlines one of the causes of slow wage growth to date. Given recent years, caution amongst smaller businesses is to be welcomed and whilst, like others, we want to see wage growth over the coming years, we urge all policy makers to be wary of the wider economic costs being faced by businesses in their arguments. The costs of living and the costs of doing businesses are inherently intertwined.

Alexander Jackman is Head of Policy at the Forum of Private Business. The Forum of Private Business is a not for profit membership organisation support small, private sector employers across the UK.

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