National Minimum Wage

Births and Deaths of Firms
Chapter 2: The Impact of the National Minimum Wage
2.126 Another way of looking at the impact of the minimum wage on firms might be to look at the
levels and changes in both business start-ups and business failures. An increase in the
minimum wage might make it less attractive to start a business as the wage costs could
increase as a result. Further, increases in the minimum wage might squeeze profits leading
to an increased number of business failures. In this section, we look at the aggregate and,
where possible, sectoral picture of business start-ups and failures, and company insolvencies.
We then summarise the available research of the impact of the minimum wage on company
formation and closure.
2.127 The stock of enterprises registered for Value Added Tax (VAT) increased in every year from
1995 to 2008 but the recession led to the stock falling in 2009 and 2010. The number of firm
deaths, businesses de-registering from VAT, rose sharply from 223,000 in 2008 to 277,000 in
2009 and 297,000 in 2010. At the same time, the number of births, firms registering for VAT,
fell from 267,000 in 2008 to 235,000 in 2010 resulting in the first net fall in the stock of
VAT-registered enterprises since 1994, when the economy was also beginning to recover
from recession.
2.128 In the low-paying industries, the stock of VAT-registered enterprises fell in every year
between 1994 and 2001 but increased continuously between 2002 and 2007 despite the
large upratings in the minimum wage. Although the stock of firms in the whole economy
increased by 2 per cent in 2008, Figure 2.22 shows that it fell marginally in the low-paying
industries. In 2009, as the economy suffered its worst recession since the 1930s, the
percentage reduction in the number of firms was greater in the low-paying industries (2.2 per
cent) than in the economy as a whole (1.8 per cent). This pattern continued in 2010, but with
an even greater net loss in firms in both the whole economy and the low-paying sectors.
Hospitality appears to have been affected more than retail.
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