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Pay growth likely to remain slow until end of the decade

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Many employees are unlikely to see much of a boost to the real value of their pay until at least the end of this decade, according to the latest Labour Market Outlook published today by the CIPD, the professional body for HR and people development.

The survey of more than 1,000 employers identifies a number of factors that are combining to keep pay growth low, even though hiring intentions remain strong. In response, the CIPD is calling on the Government to be more interventionist in its support and work in partnership with business to help improve organisations’ productivity so they can improve salaries.

The latest quarterly CIPD Labour Market Outlook survey finds that employers expecting to make a pay award during the 12 months between March this year and March 2017 plan to award a median pay increase of 1.7%.

This is the second quarter in a row when the CIPD’s survey of employers has anticipated a figure below the Government’s official inflation target of 2%. It highlights how low inflation, expanding labour supply and the lack of productivity growth are working in combination to reduce the economic pressure for employers to pay their staff more. In addition, the report finds that government-imposed increases in labour costs – such as the Apprenticeship Levy and increases to the National Living Wage – will continue to reduce the scope for employers to raise pay for other workers, while the public sector continues to see wage rises kept to 1% or less.

Mark Beatson, CIPD Chief Economist comments: “These findings show that employers remain confident about short-term job prospects, with many more expecting to take on new staff than expecting to shed staff as the UK ‘jobs miracle’ continues. For now, there’s no sign of the economy running out of jobs, or out of people to fill those jobs. However, the UK is now in its eighth year of productivity ‘go-slow’, which continues to limit the scope for employers to pay more, and recruitment and retention problems have so far proved manageable without across-the-board pay rises. This Labour Market Outlook survey provides no indication of this situation changing any time soon.

“On top of this, employers are having to manage the consequences of government-imposed increases to the cost of employing people. The National Living Wage and roll-out of pension auto-enrolment were introduced to improve the living standards of low-paid employees, but this can only happen without significant job losses if the productivity of low-paid employees also increases. Simply making low-paid labour more expensive is not the answer and the Government shouldn’t be surprised if some employers choose easier options such as reducing hours, chipping away at other benefits, or making a less generous pay award the next time pay is reviewed.

“If the Government is going to intervene in this way, these policies have to be accompanied by a more active approach to helping businesses cope with these changes and improvements to their productivity; for example by providing more practical advice and support for businesses.”

The CIPD is warning that some businesses lack the knowledge and capability to raise their game and are stuck in a cycle of low investment, low training and low ambition. This applies especially to small businesses, who often need support with the basics of running a business and managing people before they can progress to planning for expansion or raising their efficiency. Larger businesses may need help to address unresolved productivity challenges, such as the high proportion of people over-qualified for their role.

Beatson continues: “Without productivity improvements, organisations will be forced to keep pay budgets under ever tighter control, which is why we believe the current jobs-rich, pay-poor environment is likely to continue as these increased costs to business take effect.”

Key findings of the Labour Market Outlook research include:

  • Median basic pay expectations in the 12 months to March 2017 are 1.7%. Expectations are higher among SMEs (2%) than larger organisations (1%) – large employers are feeling the pinch of additional labour costs
  • Median basic pay expectations are higher in the private sector (2%) than in the public sector (1%) and voluntary sector (1%)
  • This quarter’s net employment balance – which measures the difference between the proportion of employers who expect to increase and those that intend to decrease staff levels – has increased to +28, up from the +21 since the previous report
  • Almost half (49%) of employers say they have vacancies that are hard to fill. Among these organisations, the average proportion of all vacancies proving hard-to-fill is 23%.