Wage Growth Trends in Today's Economy

Amid rising staff costs and slower hiring, Small and Medium-sized Enterprises (SMEs) are feeling the squeeze.

Wage increases are good news for employees, but can hurt margins. From April 2026, the Living Wage will increase to £12.71 an hour and will affect around 2.4 million employees.

With this wage increase, the value employees produce comes under more strain. The ONS reported in its Quarterly Economic Commentary that subdued productivity growth remains a major challenge. As well as Gross Value Added, it is only just returning to pre-2020 levels.

Other challenges to the UK’s level of productivity include underspending in the UK economy. This has led to underinvestment in skill development, keeping UK businesses in a cycle of low wages, low skills, and low productivity, as reported by The Productivity Institute.

With the immediate cost of new employees, particularly younger staff, rising due to National Insurance Contributions and wage increases, hiring has also continued to slow down.

Technology advancement has also led to the closing of positions that would otherwise be filled, and a mismatch of skills needed for a job and those available to work.

Why SMEs Feel the Pressure

With wages rising, payroll costs increase simultaneously. In a larger business, they have the scale to spread these costs across multiple departments, meaning a smaller impact on the cost absorption overall. But, in a business with a smaller scope, those costs remain high, and with the pressure of a thinner profit margin, any increase can take a sizable chunk.

This compounds by making hiring more expensive and can hurt if an underperforming hire is made, leading some SMEs to delay or freeze hiring. This can lead to existing staff taking on more workload, and productivity pressure increases as the reluctance to hire grows.

This increase also puts SMEs at a disadvantage. As the UK labour market continues to be highly competitive, SMEs can struggle to offer competitive rates and benefits that workers might find at other companies. This, combined with the growing skill gaps, can have a disproportionate effect on SMEs. Chartered Institute of Management Accountants, Mind The Gap survey reported that 79% of SMEs have skills gaps in their workforce, which in turn feeds into the productivity stagnation being felt by SMEs.

For SMEs in these situations, every decision matters. Mistakes can be highly damaging, but so can inaction. So, what can SMEs do?

Doing More with Existing Resources

The Department for Business & Trade’s Backing Your Business reported that SMEs could see productivity gains of up to 25% when combining technologies.

Manual workloads can add time and strain on HR teams, as well as managers, when they could be focusing on other tasks.

SMEs should look at automating administrative tasks, as well as using software that can auto-track timesheets and payroll. Using technology can also streamline onboarding, speeding up the time for an employee to reach full productivity.

Switching to payroll software like Access Paycircle, SMEs can save both time and money, as well as ensuring that energy can be spent where it’s most needed and not on cumbersome, repetitive tasks.

Prioritise Retention

Oxford Economics & UNUM’s joint report, The Cost of Brain Drain, found that the average total cost of replacing an employee exceeds £25,000.

Because of this, SMEs should focus on retention and internal mobility rather than reacting to staff turnover. By creating a strong and reliable core, the money spent on recruitment can be reduced and budgeted for when it is really needed.

A good way to encourage retention is to make internal progression visible and invest in role expansion before external hiring. Through the use of benchmarks and performance criteria, employees can see their progress and prevent them from feeling stifled or stagnant.

Investing in role expansion helps with a lack of upward mobility.

Since it’s not always possible to guarantee a promotion whenever desired, a good alternative is to offer skill development aligned with business needs and allow employees to grow into it.

Strengthen Productivity Measures

Productivity shouldn’t translate to working harder for the employees, and an attitude that diminishes output can damage motivation and lead to a dip in productivity.

To ensure a good balance, workloads should be measured. A well-managed workload can avoid bottlenecks, emergency reassignment, and overload, helping you stay ahead of burnout and ensure your team stays productive.

It is also a good idea for SMEs to focus on removing low-value work by streamlining and making use of automation to remove tasks that don’t require specialist input.

Finding a Balance

Growing turbulence and uncertainty can affect businesses, whether they are large-scale or an SME.

But by making good use of technology and a focus on the people you have, your business can foster resilience against a volatile market, making sure that no matter what happens, you are working from a position of strength and preparedness.