Small businesses feel the weight of wages

ACCESS TO credit and commercial rents are two issues that have emerged as a source of major concern for the sector, but what other costs and pressures are facing small and medium-sized businesses?

According to Mark Fielding, chief executive of small business group ISME, the cost of wages is one of the major issues. “Because SMEs are more labour-intensive than other businesses, they are disproportionately affected by higher labour costs. The percentage of value-added in a multinational is 8 per cent of wages – in other words, 8 per cent of all money spent is on labour costs. For SMEs, the figure is 48 per cent. Any change in wages over the last few years has had a six-fold impact on the SME sector.”

Like many in the sector, ISME believes the minimum wage has had a role in pushing labour costs to an unsustainable level. It favours a minimum income policy rather than a minimum wage, which it says would allow workers to earn more before they are taxed, as well as incentivise employers to earn more.

It is also critical of the impact of Joint Labour Committees (JLCs), which it believes set unrealistic minimum rates of pay for employees in certain sectors.

David Fitzsimons of Retail Excellence Ireland agrees. “There are already 36 different Acts covering employment rights – JLCs only serve to add a second tier of legislation.” He also questions the relevance of a concept which was devised in the 1940s.

But uncompetitive wages are not the only cost facing the sector. Patricia Callan of the Small Firms Association says that, while labour costs were once the predominant issue for businesses trying to control costs, this is no longer necessarily the case.

Wages were listed seventh in the SFA’s 2009 business cost survey, which looked at the cost pressures facing the SME sector. This is because employers have taken steps to address labour costs, Callan says.

“Wages are something businesses can control to an extent, and many employers have negotiated with employees on pay. What the business costs survey found was that costs which come under a Government remit, and which are essentially out of their control, saw the most significant price increase in the year.”

Top of the list was energy costs, with electricity prices singled out as prohibitively expensive. Compliance and regulatory costs were also cited as having increased significantly. Callan says the level of red-tape required of businesses is swallowing up resources. “In a firm with eight employees, it is estimated that half of one person’s time is taken up with administration.”

Surprisingly, rents were ranked last in the costs survey, given the level of publicity that has surrounded the issue and, in particular, the upward-only rent review. However, Callan says this is mainly due to the fact that rents primarily affect the retail sector.

One cost that affects retail as well as industrial and commercial businesses is commercial rates. Last week, Retail Ireland, the Ibec group which represents retailers, wrote to the chair of every local authority and all city and county managers requesting a 10 per cent reduction in commercial rates.

According to Retail Ireland’s Torlach Denihan, the annual rate of commercial rate valuation has increased by a cumulative 57 per cent since 2000, a cost that is borne solely by businesses.