Navigating wage increases, staffing shortages and the future of work for SMEs

The increase to the National Minimum Wages (NMW) from April 2025, will see another increase in NMW since its introduction.  While many employees and businesses favour the proposed increases which go some way to offset the uplift in the cost of living, some SMEs oppose the rise saying that it is only a ‘benefit’ to businesses that can afford it.

For many businesses employing staff at the NMW, lower wages are driven by tight margins and business models that offer little flexibility.  However, in recent years the dynamic between employers and employees has shifted, particularly since 2022 ushering in what many have described as an employee’s market.

In sectors such as retail, hospitality and manufacturing especially in densely populated regions like London, workers have increasingly had access to multiple job opportunities offering either the NMW or the National Living Wage (NLW).

Greater competition among employers has pushed many businesses to offer the higher NLW, simply to attract and retain staff.  Yet despite over 15,000 businesses being accredited by the Living Wage Foundation, recent data from the foundation shows that in 2023 approximately 3.7 million jobs still paid below the NLW.

Labour availability and Immigration

Compounding the pressure for higher wages, is the limited availability of labour. Since the UK completed its transition out of the European Union, the introduction of a points based immigration system has significantly impacted the domestic workforce.

Many sectors that had previously relied on EU workers have experienced shortages.  It is estimated that around 3.4 million EU citizens previously lived in the UK, many of whom filled critical roles in low wage sectors.

While supporters of the new immigration system argue it’s a chance for businesses to invest more in productivity and staff retention, critics warn that the UK may be deterring young international talent and reducing labour supply unnecessarily.

The role of technology and automation

With the largest ever increases to NMW and NLW on the horizon, many businesses are reassessing their staffing strategies

A growing number are shifting investment towards technology and automation. Retailers and hospitality providers for example, are enhancing online platforms to boost e commerce sales, reducing reliance on in person staff, while increasing demand for digitally skilled roles such as website developers and content creators

For SMEs however, technological investment is more difficult to afford, meaning a greater proportion of their revenue will be absorbed by rising wage costs compared to larger corporations with access to advanced machinery and automation.

Looking ahead

The upcoming increases in the NMW, along with higher national insurance contributions and expanded employment rights, present a challenge for SMEs.  However, rather than resorting to short term fixes, business owners should see this as an opportunity to review their business models, assess long term sustainability and consider strategic investments.

In the long term, some SMEs may reduce labour costs by adopting more flexible part time staffing models or investing in digital infrastructure. While these shifts may negatively impact workers already grappling with the cost of living crisis, they could ultimately support business continuity.  Alternatively, passing increased costs onto consumers, while still feasible in the current economic climate, may be a more immediate solution for some.