Member Article

Fundamental reform of the National Minimum Wage needed, says FSB

It is time for fundamental reform of the National Minimum Wage, says the Federation of Small Businesses (FSB). The way rates are set needs to change to provide greater certainty over the future direction of the minimum wage for businesses and workers.

The FSB suggests the process for setting the minimum wage is far from ideal. Currently the Low Pay Commission (LPC) advises Government on changes to the minimum wage each year but does not indicate what the rate should be beyond that point. This creates uncertainty for the 4.9 million businesses in the UK.

Furthermore, firms usually only get six months’ notice before a rate rise. Together, this short-term approach makes it difficult for employers to effectively plan ahead hampering investment and recruitment.

The FSB supported the National Minimum Wage when it was first introduced in 1999 and continues to support the measure, provided the level set does not damage business competitiveness or employment. The LPC is highly respected by businesses and its independence and expertise are its critical strengths.

Indeed its recommendations to date have consistently struck a sensible balance and have all but eradicated extreme low pay in the UK.

However it is important for the LPC take a longer term approach and the FSB believes it should also recommend future annual rates, potentially over a five year period, in line with the Office for Budget Responsibility’s economic projections. By forecasting rates in this way, businesses would have more certainty over where the Minimum Wage is heading. In addition, rather than the new rate coming into effect each October, this should be moved to April, the start of the financial year.

As the economic climate continues to improve, small firms are looking to grow and are paying their staff more. Seven in 10 FSB members intend to increase staff pay over the next 12 months, while 53 per cent already pay all of their staff a rate of pay that is equivalent to or higher than the Living Wage.

However, some small firms, particularly in sectors like social care and retail, will struggle to afford minimum wage rises that are significantly higher than inflation. It is important that the Government sticks to the LPC’s recommendations and continues to be sensitive to the pressures facing businesses in these sectors.

The FSB is also encouraging the Chancellor to explore alternative options for boosting incomes of the lowest earners: for example, increasing the threshold at which employees start to pay national insurance.

While the Chancellor has a number of important fiscal choices to make, such a move is attractive as it would boost take-home pay for low income households, increase incentives to work for the unemployed and ensure small firms remain competitive.

John Allan, national chairman, Federation of Small Businesses, said: “Setting an appropriate minimum wage, which helps to stem the fall in real wages without harming employment, is crucial. The Low Pay Commission has a great track record, but the time has come to reform radically the way the National Minimum Wage is set.

“Businesses need greater certainty of the future value of the minimum wage and that is why we are calling for a new, longer-term approach.

“There is no doubt that in recent years, wages haven’t gone as far as they once did and as economic conditions improve, we know our members want to pay their staff more. However while the minimum wage plays an important role, there are other ways of boosting the incomes of low earners which merit serious consideration, including through the tax system.”

This was posted in Bdaily's Members' News section by Tom Keighley .