Minimum wages and the UK stock market – the impact on investors

One of the unsurprising, but nonetheless significant, parts of last month’s UK autumn Budget was the 6.6% rise in the minimum wage to £9.50 an hour.

This is clearly welcome for lower paid employees across the UK. But knock-on effects for businesses can be considerable. Increased minimum wages feed quickly into higher wage bills. Not only those actually paid the minimum wage, but it could have a knock-on effect for employers who intentionally pay a little more. These cost pressures must be offset by either higher prices or cost cutting if profit margins are to be maintained.

Pressure from rising minimum wages are more meaningful for some businesses than others. We’ve set out to get an idea of which UK listed businesses are most at risk, as well as those that aren’t as impacted.

This article isn’t personal advice. All investments can fall as well as rise in value, so you could get back less than you invest. If you’re not sure an investment is right for you, seek advice. Past performance is not a guide to the future.

Why wages matter

The graph below shows the upper band for the minimum and living wages since they were introduced in 1999. Between 1999 and 2020, annualised growth was 4.0% a year – well ahead of wider inflation at 2.76%.

Upper minimum wage/living wage (£/hour)

Scroll across to see the full chart.

Source: Low Pay Commission/GOV.uk

With minimum wages rising faster than wider inflation, cheap labour is becoming an increasingly expensive input. That’s before considering the effect of recent labour shortages on market prices. This is particularly problematic for industries that rely on large numbers of relatively cheap workers.

The table below lists the ten largest employers in the FTSE 350 index of large UK companies. As well as the number of employees, it also gives the overall salary and benefit bill. Based on this, we’ve calculated the average wage bill per employee.

Source: Refinitiv, as of Monday 8 November.

There are a few caveats we should clarify before we go any further.

Employee numbers include all employees. That means part time and international workers as well.

Part time workers will skew the average salary per worker lower than a company which only employs full time staff – even if the average hourly wage is the same.

International workers might not be subject to the same upward pressure in minimum wages as in the UK, although minimum wages have generally been rising globally over the last ten years. General pay levels might be higher or lower depending on the markets in which they operate.

Still, what this table does provide is a useful insight into the kinds of companies most at risk from a rise in wages for lower paid workers.

Unsurprisingly, it’s the retail and hospitality sectors that leap off the page. The likes of Tesco, Compass and Primark owner Associated British Foods all have large numbers of staff and are at the low end on average salary expense per worker.

By comparison, companies like HSBC, WPP and BT all have a relatively high average salary. They might employ large numbers of staff, but they’re less likely to be exposed to the lower end of the market where government wage increases can push up costs.

Pay and profits

So what does all this mean for investors?

You can avoid the minimum wage issue altogether by investing in businesses that have high average wages. However, while wages higher up the salary chain are set by the market rather than regulators, that doesn’t mean those businesses avoid wider wage inflation pressures.

Not only do companies with large numbers of employees have to contend with wage inflation, but reliance on large numbers of staff also makes expansion more difficult. One employee can’t be in two places at once, and so a new store requires hiring new people.

This is one reason why software businesses have historically been so attractive to investors. Once Microsoft Word has been built, selling it to a new customer is essentially costless. No new staff are needed, and the extra revenue is all profit.

However, with technological innovation stretching into ever more industries, there are new opportunities for investors in previously staid, labour intensive industries. Increased labour efficiency not only takes some of the pressure off wage inflation, but it also makes the group generally more efficient. A particularly powerful tool for companies with large numbers of staff.

Premier Inn owner Whitbread recently announced that it’s looking to invest in new systems to improve labour scheduling efficiency, while Tesco recently launched its first checkout-less store. Meanwhile Royal Mail is investing hundreds of millions in automating its parcel sorting operations.

These sorts of innovations free up staff time to focus on value-add activities – supporting increased sales, while keeping costs flat and increasing customer satisfaction. For investors, that means some historically unattractive companies could be worth a second look

Companies with lots of opportunity to increase labour efficiency, with the ability and willingness to invest, could present an interesting investment opportunity.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research disclosure for more information.

Share insight: our weekly email

Sign up to receive weekly shares content from HL.