Still staying underground? Informal work, small firms and the National Living Wage

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“How are small firms actually implementing the National Living Wage (NLW)? Will the NLW and accompanying efforts to boost enforcement shock errant firms into compliance? And what distinguishes compliant from non-complaint firms?”

By Monder Ram, Director, Centre for Research in Ethnic Minority Entrepreneurship (CREME)

Based on research by Monder Ram (Birmingham Business School, University of Birmingham), Paul Edwards (Industrial Relations Research Unit) and Guglielmo Meardi (Warwick University)

A lot is being made of the potentially transformative properties of the National Living Wage (NLW). Introduced in April 2016 at an initial rate of £7.20 (now £7.50) it was described by the National Minimum Wage Low Pay Commission Report in Autumn 2016 as a ‘step into the unknown for the UK’s wage floor’. Early evidence from Income Data Research of employer responses takes the form of broad-brush coverage of sectors, with little attention to the concrete experiences of owners and workers in small firms. Studies have yet to address the particular issue of non-compliance with the NLW, which is the particular issue that we are investigating for an ongoing study funded by the Low Pay Commission.

How are small firms actually implementing the NLW? Will the NLW and accompanying efforts to boost enforcement shock errant firms into compliance? And what distinguishes compliant from non-complaint firms?

We are in the middle of investigating these questions with an interesting sample of case study firms. Many are businesses we have researched on the impact of NMW the results are published in the Journal of Management studies, which includes firms that participated in our research on the introduction of the National Minimum Wage (NMW) in 1998. This will enable to us to assess whether the experience of implementing the NLW (or not) is qualitatively different to that of the NMW. Our current study also includes firms that are ‘leading edge’, mid-range, and stubbornly non-compliant. A wide range of Businesses will therefore be investigated, including a focus on the experiences of long established businesses, and more recently formed enterprises run by recently arrived migrants.

Key insights

It is too early in the process to share findings, but key insights from our earlier work are worth restating. First, the market context will affect firms’ capacity to respond. The greater the financial and competitive pressure that firms face, the more difficult it will be for them to absorb any costs of regulation. Our earlier work on restaurants and clothing firms drew attention to extreme competitive pressures facing both sectors.

Impact of payment practices

Second, payment practices are more likely to be determined by informal institutional norms rather than official diktat. Firms using informal employment practices existed long before the arrival of the NMW. A measure of this kind was unlikely to overturn deeply embedded practices. Here, the most important considerations are market conditions, ‘ability to pay’, negative perceptions of state interference and the absence of compelling pressures for wage increases.

Contrast of informal practice v compliant firms

Perhaps most revealing of all our findings is the contrast between the informal majority and the comparatively small minority of compliant firms, who for a variety of reasons – fear of detection, desire for growth, greater transparency, better information, positive perceptions of the benefits of “going straight” – have decided that informal working beyond the reach of official regulations is simply unworkable.  Unhappily for advocates of assimilating informal enterprises into the mainstream, it would evidently take a great deal more than pious exhortation to get others to follow the example of these role models.

Early analysis from our current study suggests that the NLW is posing a challenge for compliant firms. For example, the owner of the leading-edge business in our study – who said the NMW was set too low in 1998 – was struggling to reconcile rising wage costs with spiralling raw material costs and an inability to secure a price rise increase his supermarket customer base. He was unsure how he would handle the upratings built into the NLW. The non-compliant firms we’re researching are oblivious to the NLW and the steps that authorities have recently introduced to enforce the measure. This suggests the experience of the NMW may not be an accurate guide for the NLW.

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