The living wage could spell the end for some smaller companies

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The number of major retailers announcing impending pay increases seems to be growing by the day, seemingly inspired by the Chancellor’s surprising commitment to what he called a National Living Wage.

Cynics may say that one motivation for this uncharacteristically altruistic move was to wrong foot opposition parties such as Labour and the Greens who have advocated the pay reforms proposed by the Living Wage Foundation (LWF).

That said, George’s Osborne’s aspirations fall somewhat short of the LWF’s, but on the face of it we have a welcome move in the right direction.

Good PR

The new rates don’t come in until next year but there may be an ulterior motivation for some larger retailers upping the wages ante now, and in some cases going beyond new statutory requirements.

Not only does it gain them kudos points in the PR arena, but it also piles pressure onto their competitors to follow suit. Happily for employees, wages may just have become a much more competitive battleground.

Tesco for example is facing a crescendo of calls to chase that foreign upstart Lidl down the living wage trail at a time it can ill afford to add further financial pressures to its already creaking P&L sheets.

For most larger retailers, though, paying the higher rate shouldn’t really be a problem. They may have to do some shuffling, but it should only make a small dent in their profitability. Certainly there may be a few long faces at the next shareholder meeting, but a couple of extra glasses of Champagne will probably help them see the positive side.

I have to admit to some bemusement at the recent whinnying from Lord Wolfson about Next’s wage bill increasing by £27m as it also announced profits of nearly £350m. For someone reportedly earning £4m a year himself, it seems rather churlish to begrudge his staff a mere 8% dividend on the profits they helped to generate.

Problem for small firms

For smaller businesses, the picture is somewhat different. For many independent retailers already struggling with overheads increasing every year, the living wage is going to be much harder to deal with, especially as we now see that the denouement of the Chancellor’s plot was to pave the way for a shredding of the tax credit system.

In the face of scant support elsewhere, tax credits have tangentially helped small businesses by topping up the wages of their lower-paid staff. While I agree that for larger operators it’s difficult to defend such subsidisation, for some smaller companies it’s something of a lifeline.

I know of shop owners trading at the very margins of profitability, often only drawing a minimal salary themselves, sometimes well below the minimum or living wage.

They can’t simply magic the money to cover additional wages out of thin air without help on other overhead priorities. Most notable among these is business rates, which was the subject of yet more empty political posturing at the Conservative Party Conference.

Many are also creaking under the weight of additional pension liabilities now being phased in. The alternatives for these retailers will be to further reduce staff numbers, break the law, or simply go under.

Other options

There is the argument that if you can’t afford to pay a decent wage, you shouldn’t be in business anyway, but that is an attitude that runs contrary to the ethos of the living wage principle.

Surely small business owners have the right to make a reasonable living as well as their staff, and options such as statutory profit or equity sharing could be considered for smaller employers and their employees.

I’m a supporter of the living wage and I’m delighted it’s finally starting to become a reality.

But it can’t simply be waved into existence without some thought for the implications for companies that, no matter how much they may back the principle, will genuinely struggle to pay it.

Without a more comprehensive approach to the overall economic model that these businesses face, it’s likely that, for some of them, the living wage could easily become the living end.