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Pay rises remain subdued

Contributor: Gerwyn Davies |
real living wage

Hiring demand remains strong whilst unemployment is at a record low. The latest CIPD/The Adecco Group Labour Market Outlook suggests that UK employment will again grow strongly in the third quarter of 2017, but wage growth is likely to remain weak.

The quarterly survey of more than 1,000 employers identifies that near-term employment expectations have risen compared with the previous spring report (May 2017). This is reflected in the quarter’s net employment balance – a measure of the difference between the proportion of employers who expect to increase staff levels and those who expect to decrease staff levels in Q3 2017 – which shows an increase from +20 to +27 during the past three months.

However, while the UK labour market remains buoyant, basic pay award expectations for the next 12 months remain at just 1 percent. The subdued basic pay award outlook can be attributed to a range of reasons. Against the backdrop of poor productivity growth, the report points to an increase in labour supply over the past year as a key factor behind the modest pay projection. This is driven by relatively sharp increases in the number of non-UK nationals from the EU, ex-welfare claimants and 50-64 year olds; although the report is keen to stress the future migration trends appear highly uncertain.

The increase in labour supply may explain why the jobs market remains challenging for some jobseekers, especially those seeking lower-skilled jobs. Employers report a median number of 24 applicants for the last low-skilled vacancy they tried to fill, compared with 19 candidates for the last medium-skilled vacancy and eight applicants for the last high-skilled vacancy they were seeking to fill. Overall, employers felt that around half of applicants were suitable for each role they were recruiting for. The variation across skill level is also consistent with labour market trends which show that high-skilled occupations account for a large share of the number of jobs created during the past year in contrast with the low proportion of low-skilled jobs that have been generated.

Looking more closely at pay, in the private sector, almost a quarter of firms cite delivering the National Living Wage (23 percent) as a brake on pay growth, a further fifth (21 percent) cite uncertainty over access to the single market, and a fifth (21 percent) reference the Government’s auto-enrolment pensions scheme as acting as a challenge. More than a fifth of firms (21 percent) also report that affordability is weighing pay down, underlining the urgent need to address weak productivity growth in the UK. Meanwhile, around three quarters of public sector employers (72 percent) say that restraint in the public sector is the main reason why they cannot match the inflation rate target of 2 percent in their next basic pay award.

Recent CIPD research also indicates that employee pay expectations are weaker this year compared with last year, which may suggest that employers are not coming under any additional pressure to raise pay from workers, despite the low unemployment rate.

Looking back, the median for all basic pay decisions that were undertaken in the first six months of 2017 is 1.5 percent. This may imply that employers have become more pessimistic about basic pay growth over the past six months against the backdrop of a slowing economy.

Gerwyn Davies, Senior Labour Market Analyst for the CIPD, the professional body for HR and people development, said: “Predictions of pay growth increasing alongside strong employment growth is the dog that hasn’t barked for some time now, and we are still yet to see tangible signs of this situation changing in the near-term. The facts remain that productivity levels are stagnant, public sector pay increases remain modest while wage costs and uncertainty over access to the EU market have increased for some employers. At the same time, it is also clear that the majority of employers have still been able to find suitable candidates to employ at current wage rates due to a strong labour supply until now.

“The good news is that the UK labour market continues to go from strength to strength. This is particularly good news for jobseekers, especially the long-term unemployed, who have recently been able to move into work more quickly than in the past. We believe therefore that the Bank of England was right to give more weight to the prospects for pay and productivity than to the rise in employment in their recent interest rate decision.

“Against the backdrop of future migration restrictions and a tight labour market, the need for a workforce development plan is greater than ever.”

Alex Fleming, President of General Staffing, The Adecco Group UK&I commented:  “This quarter’s report demonstrates strong and stable employment intentions. These have remained in a positive range for the last two years during which time we have seen unemployment consistently fall. Context is important here though: employers continuing to hire isn’t, necessarily, an indication that they are convinced of a bright economic future, rather that nothing significant has changed in recent months.

Many employers are getting on with the day-to-day hiring required to keep their businesses ticking along until they have enough information to build concrete recruitment plans. “Overall, our labour market picture looks promising especially considering the unknown future impact of Brexit on the flow of talent in and out of the UK. Strong labour supply is a key contributor: the long-term unemployed are finding work more quickly and the amount of workers aged 50-64 who are in employment has risen by around 200,000 during the past year. “However continued subdued wage growth that the labour market is currently facing is a real issue that employers need to tackle head on. Employers must to invest in staff to increase productivity, thus in-turn providing them with the opportunity to increase wage growth.”

Ahead of the release of the Equality and Human Rights Commission’s strategy on tackling gender, ethnicity and disability pay gaps tomorrow (15th August 2017), please see below for a statement in response from Sandra Kerr OBE, Race Equality Director, Business in the Community.