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Double-edged sword: Wage rise boosts workers, but hurts SMEs

Small and medium businesses (SMEs) face a tough squeeze as the minimum wage increase adds pressure to their already strained finances, according to Ben Thompson, CEO of Employment Hero.

 “”Business owners, especially those from small to medium enterprises, have faced significant challenges in recent years. While it’s vital to empower employees with increased spending power, we must also ensure the sustainability of the very businesses that employ them. From our platform data, we know that small business growth has halved since last year and many are now fighting for their lives.”

Furthermore, Ben acknowledged the complexity of raising the minimum wage, highlighting the influence of various economic factors like potential inflation. He pointed to data from their SME Index showing stagnant business growth alongside a significant 7.8% increase in employee wages over the past year. “Our latest SME Index shows that alongside falling growth, employee wages have increased by 7.8 per cent over the past year. There’s no easy solution here when inflation is running the way it is and wages are outpacing inflation by over 100 per cent. Further additional increases must be carefully considered, as they will continue to place added pressures on the cost of doing business. Australia relies on the health and prosperity of our small business community, we need to be doing all we can to help them.”

“One initial but important step businesses should be taking is to ensure they are compliant with the upcoming wage and awards changes. Employers and payroll managers will need to adjust their payroll in order to minimise the risk of facing costly penalties. For those needing to do this, there is help on offer. For example, businesses using the Employment Hero platform are able to benefit from updated versions of the award packages on the 1st of July every year. This automation will help to reduce admin burden on businesses, while ensuring payroll compliance – so that staff are paid correctly.”

COSBOA CEO Luke Achterstraat said that small businesses seek to provide rewarding and well remunerated jobs but rising costs and sinking productivity puts 2.5 million small businesses further at risk.

“The levy has broken for many small businesses with rising energy, rent, insurance and borrowing costs. This increase of 3.75 per cent to wage costs when annual productivity is at 1.2 per cent does not add up or bode well for jobs.

“The figure comes on top of the 5.75 per cent legislated last year – which was the highest in a decade – plus an impending increase in the superannuation guarantee, and an increase in the Temporary Skilled Migration Income Threshold (TSMIT) of almost 40 per cent from just over 12 months ago.”

Mr Achterstraat said employment costs also included superannuation, workers compensation and payroll tax. “A $50 increase in wages means a $59 increase in total costs for small businesses. Owners will be forced to pass on these costs which means higher prices and inflation.

“And where they are unable to do so, they face the insidious decision of reassessing staff levels and possible job losses.” Mr Achterstraat said it was easy for politicians to welcome rising costs when someone else is paying for it. Particularly in labour-intensive industries like hospitality, retail and services, labour costs can represent almost half of the overall operating costs.”

“Small business owners are struggling with 43 per cent currently not breaking even. Owners are paying themselves less than the average salary and working longer than the median to keep the lights on.”

Mr Achterstraat said the operating environment for small business is tougher than ever. “ASIC’s Insolvency Statistics published last week show the horrid figure of business insolvencies in NSW now up 61 per cent from this time last year.

“We urgently need better policies that promote productivity and innovation to ensure strong wage growth is sustainable. Failure to do so will only push more small businesses to the wall,” said Mr Achterstraat.

Australia’s independent wage-setting body, the Fair Work Commission (FWC), announced a 3.75% increase in the national minimum wage, aiming to keep pace with rising living costs. Effective July 1, the minimum wage will rise to A$24.10 ($16.05) per hour, translating to an extra A$33 per week for roughly 2.6 million low-paid workers, or about one-fifth of the Australian workforce.

The FWC’s decision prioritizes aiding low-income earners who are struggling with inflation, although the increase is lower than last year’s 5.75%. The commission acknowledged the ongoing cost pressures on households but balanced this with the need to consider stagnant productivity growth. “It is not appropriate at this time to increase award wages by any amount significantly above the inflation rate principally because labour productivity is no higher than it was four years ago,” the FWC stated.

Australia’s consumer price inflation recently reached a five-month high of 3.6% in April, adding pressure on the economy and potentially influencing future interest rate decisions. This inflation spike underscores the challenges faced by low-income workers, prompting the FWC to act, despite the less favorable economic conditions for significant wage increases.

Small and medium-sized enterprises (SMEs) face a double-edged sword with the minimum wage increase. On one hand, higher labor costs threaten profitability, which may lead to hiring freezes, reduced employee hours, or even price hikes to offset the increased expenses. These adjustments can be particularly challenging for small businesses already dealing with rising energy, rent, insurance, and borrowing costs.

On the other hand, the wage increase could lead to a more motivated workforce and potentially boost consumer spending as workers have more disposable income. This increased spending power can stimulate the economy and benefit businesses in the long run. To navigate these changes, SMEs may need to conduct careful financial analysis, explore cost-saving measures, upskill employees to enhance productivity, and consider strategic pricing adjustments.

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Yajush Gupta

Yajush Gupta

Yajush is a journalist at Dynamic Business. He previously worked with Reuters as a business correspondent and holds a postgrad degree in print journalism.

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