The Impact of the National Minimum Wage in Small Firms
| Date | 01 September 2003 |
| DOI | http://doi.org/10.1111/1467-8543.00281 |
| Author | Mark W. Gilman,Paul Edwards,Monder Ram,James Arrowsmith |
| Published date | 01 September 2003 |
The Impact of the National Minimum
Wage in Small Firms
James Arrowsmith, Mark W. Gilman,
Paul Edwards and Monder Ram
Abstract
The introduction of the National Minimum Wage (NMW) had potentially sig-
nificant implications for small firms. Orthodox economic theory predicts adverse
consequences, though institutional analysis points to potential efficiency as well
as fairness effects. Using longitudinal data on 55 firms, this paper examines the
impact of the NMW in small firms in clothing manufacture and hotel and cater-
ing. Different patterns of adjustment were observed, explained by both size and
sector characteristics. Overall, the impact of the NMW was mediated by the
informality of employment relations in the small firm.
1. Introduction
The election of Labour governments in 1997 and 2001 led to a series of new
regulations to bolster individual and collective rights at work. The major
changes included a new national minimum wage (NMW); the first complete
statutory framework for the regulation of hours of work and holidays (the
Wor king Time Regulations, or WTR); new and improved ‘family-friendly’
provisions relating to maternity, parental and emergency leave; equality for
part-time workers; and new rights for trade union recognition, representa-
tion, information and consultation. As a result, ‘the law now shapes UK
industrial relations in a way that would have been inconceivable even in the
recent past’ (McKay 2001: 285). This juridification of the employment rela-
tionship puts the study of small firms firmly centre-stage. Most people
outside the public sector now work in small firms,1and it is here that the
effects of the new regulations might most strongly be felt. This is not just
because pay and conditions tend to be inferior to those of larger companies
(McNabb and Whitfield 2000). Small employers commonly have to juggle all
British Journal of Industrial Relations
41:3 September 2003 0007–1080 pp. 435–456
James Arrowsmith and Paul Edwards are in the Industrial Relations Research Unit,University
of Warwick. Mark Gilman is in the University of Kent Business School. Monder Ram is in the
Business School at de Montfort University.
© Blackwell Publishing Ltd/London School of Economics 2003. Published by Blackwell Publishing Ltd,
9600 Garsington Road, Oxford OX4 2DQ, UK and 350 Main Street, Malden, MA 02148, USA.
the various responsibilities that are allocated to specialist departments in
large organizations — purchasing, marketing, operations, finance, and of
course personnel. Authority is usually expressed in personal terms, often sub-
jectively and with large scope for management discretion (Goss 1991). Legal
regulation can therefore have potentially significant procedural as well as sub-
stantive effects in small firms.
The NMW was introduced from April 1999 with a minimum adult hourly
rate of pay of £3.60 (subsequently revised to £3.70 from October 2000, £4.10
from October 2001 and £4.20 from October 2002) and a lower youth rate for
workers aged 18–21 of £3.00 (£3.20 from October 2000, £3.50 from October
2001 and £3.60 from October 2002). Though the initial rate was commonly
perceived to be set at the lower end of expectations, the Low Pay Commis-
sion (LPC) found that around 1.3 million workers received higher earnings
as a result (LPC, 2001: 18). The LPC also concluded that on the whole, and
against the background of a strong economy, the impact on prices, jobs and
competitiveness was relatively benign (LPC 2001: 101). However, as the LPC
concedes, such whole economy analysis ‘tell[s] us little about the processes of
employer and employee reactions, which will require additional research’
(LPC 1999: 29). These processes of adjustment, and their outcomes, include
knock-on effects arising from the restoration of pay differentials; substitu-
tion between groups in the labour market; adjustment to increased costs
through changes to prices, employment levels, hours, pay structures, training,
work organization or profits; and avoidance or evasion strategies (LPC 1999:
29). These were the issues that formed the basis of the present research in the
two sectors most affected by the introduction of the NMW, clothing manu-
facturing and hotels and catering services.
2. Theoretical framework and research questions
Small firms share one obvious characteristic: their size. This underwrites two
universal views of employment conditions in small firms. The first may be
characterized as ‘small is beautiful’, and was popularized by the report of the
Bolton Committee in 1971. This rests on the observation of a close physical
proximity between manager and workers, which it is argued promotes a
mutual and informal ‘give and take’ that undermines collective organization
and conflict. Wages might be lower than in large firms, but workers willingly
concede this in return for a more congenial work environment. More recently,
small businesses have been seen as less ‘bleak house’ than representing ‘the
ideal site for the development of a HRM approach’, because of their direct
communications and flatter hierarchies, the directly observable contribution
of each employee to organizational performance, and the more immediate
ability of the owner–manager (OM) to envisage and bring about change
(Bacon et al.1996: 98). One implication is that there is little pressure
from employees in small firms for higher pay, especially if this would result
in an elimination of either the ‘slack’ or ‘responsiveness’ in terms of the
436 British Journal of Industrial Relations
© Blackwell Publishing Ltd/London School of Economics 2003.
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