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 theUnited Kingdom in 1999 as part of New Labour's active labour-market approach.The level has been uprated on several occasions since then. Most researchsuggests that the NMW has benefited low-paid workers while having littleadverse impact on employment levels. This paper explores the regional impact ofthe NMW on the small business sector, using data from the Federation of SmallBusinesses' biennial survey, the largest business survey in the UnitedKingdom. Overall, just over 21% of businesses with employees uprated employees andjust under 10% of employees have benefited from pay uprates. The impact hasvaried across industries, with the greatest effects in the hotels and cateringsector. In general, affected businesses have anticipated that they would beable to absorb the costs, although in some cases at the expense of a slightdecline in profitability. The impact of the NMW also varies across the regions, having the leastimpact in London and the South East and the greatest impact in the 'north'. Inthe northern regions, businesses are less able to absorb the increased costsand more likely to respond by increasing prices. This has potentialimplications for the competitiveness of small and medium-sized enterprises inthese regions, which is more likely to be based around price and costadvantages than their counterparts in the south. The Low Pay Commissiontherefore should give greater attention to the geographical impacts of the NMWin its evaluation and when proposing future increases in the rate.(Publication abstract)

Keywords: Federation of Small Businesses (UK), Minimum wages, Wage workers, Wages & salaries, Regional economies, Labor economics, Public policies, Regional analysis