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News - 26 March 2005

Is the minimum wage starting to bite?

Many businesses complain that the rising level of the national minimum wage is forcing up businesses' pay bills for the first time. Nothing new there. But now the Governor of the Bank of England thinks the same.

Mervyn King said yesterday that rising wage pressures were the key upward risks to the Bank's inflation target combined with consumer spending, which had slowed "quite markedly" both in the three months before Christmas and so far into the new year.

He told MPs on the Treasury Select Committee. "We are in a delicate position,"

His comments were seen in the City as a sign that the Bank's Monetary Policy Committee would leave rates unchanged at next month's meeting but he rejected arguments from the retail sector that consumer confidence was weak enough to justify a rate cut.

On the labour market, the Governor said there had been a "small upward" shift in pay in recent months. "It is fair to say that over the last year I have heard more comments on the impact of the minimum wage from employers - markedly more," Mr King said. "It is having an impact and employers are beginning to say this is affecting settlements for pay above the minimum wage who are trying to restore their [pay] differentials."

He said annual pay growth in the hotel and restaurants sector, which accounts for vast numbers of low-wage posts, was running at 6.8 per cent.

Mr King added that the 130,000 workers who have come from Eastern Europe in the eight months since EU enlargement were "not trivial" in keeping wages under control.

Until now, despite some belly-aching,  the national minimum wage has not been a significant problem for employers but there are signs that it is starting to bite as the rate is raised this year and probably next year too.

Brighton & Hove is dominated by small businesses that employ fewer than 10 people (85% of the businesses) and by and large they take their responsibilities towards their employees very seriously. Even in the traditionally low paid industries like hospitality and retail, many companies have had a deliberate policy of paying above the minimum wage. The Low pay Commission reported that the rise in the minimum wage from £4.50 to £4.85 in 2004 benefitted 1 in 5 workers which would indicate that 80% were already getting more than £4.85. But as the rate rises this gets harder to do.

This is a problem for the hospitality sector but a much worse problem for the independent retail sector which is faced with the double whammy of declining consumer spending and increased overheads in the form of uniform business rates and rents.

Read related items on:
Retail, pubs, clubs and restaurants
Tourism, entertainment and hospitality
Bank of England
King, Mervyn

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