Small Firms

3.8 According to the latest data available from the Small Business Service (SBS), at the start of 2003 there were just over one million firms (comprising the private sector, non-profit organisations and Government) in the UK employing between one and nine workers. A further 170,000 firms employed between 10 and 49 workers. Ninety-seven per cent of firms with employees in the UK employ fewer than 50 people (and are thus commonly defined as a small firm), and they account for 29 per cent of employment (27 per cent of employees) and 31 per cent of turnover. This compares with large firms (those with 250 or more employees), which account for less than 1 per cent of all firms but for 63 per cent of employees and 56 per cent of turnover. The proportion of small firms operating in the low-paying sectors is broadly in line with the economy as a whole.

3.9 In previous reports we found that small firms were disproportionately affected by the minimum wage. Figures 3.5-3.7 demonstrate that the coverage of the minimum wage (the height of the spike at the adult rate of the minimum wage) appears to get smaller as firm size increases, suggesting that smaller firms continue to be more affected by minimum wage upratings.

Figure 3.5

Hourly Earnings Distribution for Employees Aged 18 and Over in Small Firms, 2002-2004

Source: ASHE, April 2002-2004 without supplementary information.

Notes:

1. Businesses with 1-49 employees.
2. NMW label shows the adult NMW rate in April of the given year.
3. Gross hourly earnings excluding overtime.

Figure 3.6

Hourly Earnings Distribution for Employees Aged 18 and Over in Medium-sized Firms, 2002-2004

Source: ASHE, April 2002-2004 without supplementary information.

Notes:

1. Businesses with 50-249 employees.
2. NMW label shows the adult NMW rate in April of the given year.
3. Gross hourly earnings excluding overtime.

Figure 3.7

Hourly Earnings Distribution for Employees Aged 18 and Over in Large Firms, 2002-2004

Source: ASHE, April 2002-2004 without supplementary information.

Notes:

1. Businesses with 250+ employees.
2. NMW label shows the adult NMW rate in April of the given year.
3. Gross hourly earnings excluding overtime.

'The NMW is having an increasing impact on small businesses. It is evident that members' clients now have stronger views on the NMW. In 2000 and 1999 the majority of members perceived their clients to be 'indifferent' towards the NMW. In the latest survey, members see their clients as being significantly more 'divided' on the issue, with increasing numbers being either 'for' or 'against'.'

Association of Chartered Certified Accountants evidence

3.10 However, some evidence from our consultation suggests that the minimum wage is having less impact on small firms than was previously the case. Only one per cent of the 7,000 small and medium-sized enterprises with employees in the SBS annual survey of 2003 identified the minimum wage as an obstacle to their success. This compares with 6 per cent in their equivalent 2001 surveys.

3.11 Moreover the Federation of Small Businesses (FSB) advised us that in general the results of its survey of small to medium-sized enterprises, carried out in November 2003, reflected well on the operation of the minimum wage. In the survey, which received over 18,500 responses, 16 per cent of respondents reported having to increase pay for adult workers and 7 per cent for 18-21 year olds following the October 2003 upratings. One in five respondents reported that they would increase pay in order to maintain differentials. The FSB stressed, however, that the impact varied by sector and by region.

3.12 On the other hand, there were some bodies which maintained that small firms continued to be more affected by the minimum wage and that the impact is increasing. One such organisation was the Association of Chartered Certified Accountants. It advised that small businesses often lacked the resources to implement increases. It also noted that businesses in certain sectors are particularly affected by the minimum wage and stated that the impact of the minimum wage on different sectors required more consideration.

3.13 In our fourth report (2003) we found that small firms were often unaware of the information available on the minimum wage, including the National Minimum Wage Helpline. As a result we recommended that the Small Business Service actively promote and disseminate factual information on the minimum wage tailored to the requirement of small firms. The subject did not emerge as an issue in our consultation this time round, suggesting that progress has been made. Moreover, the research we commissioned from Cronin and Thewlis (2004), on small firms' adjustments to the minimum wage, found that nearly all the employers involved knew the current adult rate.