UK small businesses hit by hiring woes despite record wage rise

The latest Xero Small Business Index, was unchanged in May at 86 points and showed the number of people employed in small business fell by 5 per cent year-on-year (y/y) in May. In fact, there are now 11.1 per cent fewer jobs in small businesses than there were in February 2020, before the pandemic began.

Despite stronger sales growth (14.3 per cent increase y/y) and a record rise into wages among small firms (5 per cent increase y/y), they appear to be struggling to compete with big business when it comes to salaries, perks and job security.

Concerningly, late payments to small businesses also increased in May, with the average time to pay rising by 1.1 days to 30.6 days. On average, payments were late by 8.8 days beyond the agreed terms, an increase of almost two days since the previous month.  

This has a knock-on effect on small businesses’ ability to manage their cash flow and meet the higher wage expectations from current and prospective employees.  

In May, small businesses in the construction and manufacturing industries saw the biggest drop in employee numbers, falling 10.8 per cent and 10 per cent y/y respectively.

As construction and manufacturing make up 7.2 per cent and 9 per cent of total employment in small firms, an inability to fill vacancies in these sectors will have severe implications for the rest of the economy.

In contrast to all other industries, sales by small businesses in retail fell by 1.3 per cent y/y. This is the second consecutive month that retail sales have fallen, and in May, it was the only sector to record negative sales growth. This highlights the impact the cost-of-living crisis is having on businesses that rely on consumers who are spending less on the high street.

The hospitality sector is offering record wages, 7.7 per cent higher last month than in May 2021, yet attracting workers remains difficult, with jobs falling 3 per cent y/y.

London was the only region to show jobs growth, at 2.3 per cent y/y, while the West Midlands saw a staggering fall in jobs of 8.3 per cent y/y, followed by the East of England at 7.5 per cent y/y. 

Alex von Schirmeister, managing director UK & EMEA at Xero, said small firms are facing a major talent crisis.

“They are having to offer some of the highest wages in recent memory to compete for staff, which is just piling more pressure on them with other rising costs,” he said. “That’s troubling in sectors such as manufacturing and construction that are inherently linked to other industries, like retail.

“The government must do more to help in areas like late payments. When big businesses hold on to unapproved debt, it chokes small firms’ cash flow so they can’t compete for workers. We need to incentivise early payments and penalise late payers, and expose the repeat offenders.”