The Effect of the National Minimum Wage on the UK Small Business Sector: A Geographical Analysis

Abstract

A national minimum wage (NMW) was introduced into the United Kingdom in 1999 as part of New Labour's active labour-market approach. The level has been uprated on several occasions since then. Most research suggests that the NMW has benefited low-paid workers while having little adverse impact on employment levels. This paper explores the regional impact of the NMW on the small business sector, using data from the Federation of Small Businesses' biennial survey, the largest business survey in the United Kingdom. Overall, just over 21% of businesses with employees uprated employees and just under 10% of employees have benefited from pay uprates. The impact has varied across industries, with the greatest effects in the hotels and catering sector. In general, affected businesses have anticipated that they would be able to absorb the costs, although in some cases at the expense of a slight decline in profitability. The impact of the NMW also varies across the regions, having the least impact in London and the South East and the greatest impact in the ‘north‘. In the northern regions, businesses are less able to absorb the increased costs and more likely to respond by increasing prices. This has potential implications for the competitiveness of small and medium-sized enterprises in these regions, which is more likely to be based around price and cost advantages than their counterparts in the south. The Low Pay Commission therefore should give greater attention to the geographical impacts of the NMW in its evaluation and when proposing future increases in the rate.