Half of retail and hospitality businesses have increased prices as a direct result of the introduction of the National Living Wage in April 2016 and subsequent increases in the legal minimum pay rate, according to a government-commissioned report by the University of Sheffield.

A study of retail and hospitality businesses in Sheffield and Greater Manchester found almost half (45.6 per cent) had responded to increases in wages by not replacing staff who left, while more than a quarter (25.6 per cent) reduced the number of full-time employees and 38.6 per cent increased their use of variable hours (including zero hours) contracts. 

Some companies had also cut paid breaks, overtime, bonuses and subsidised meals, and many replaced older workers with younger staff.

The vast majority (70 per cent) of businesses said the changes had negatively impacted their profits – with one in four claiming it had done so to “a large extent”. Some businesses  also cited other major cost pressures such as business rates, VAT and pension expenses as having an impact, reflecting the range of cost pressures small- and medium-sized businesses face.

The report is the result of a research project by the Sheffield University Management School’s Centre for Decent Work, which was commissioned this year by the government’s Low Pay Commission. The study covered Greater Manchester and Sheffield City Region, which have been identified as having persistently low productivity levels, where the hospitality and retail sectors are among the fastest growing sectors in terms of employment. In both regions, wages in the retail sector are below the national average.

Professor Jason Heyes, Chair in Employment Relations at the University of Sheffield, who led the project, said: “Our evidence shows that small businesses in the retail and hospitality sectors are operating under huge cost pressures, and increases to the National Living Wage have led them to find ways to cut spending – sometimes in ways that potentially undermine some of the financial benefit of the baseline pay boost for workers.

“What is clear is that the capacity of these organisations to respond to cost pressures through investment in ‘good work’ measures such as increased training and development, career progression for existing employees and other strategies that might boost long-term productivity is very limited.”