UK wages set to lag behind inflation over next year

More than half of employers in the UK plan to increase wages by just 1 per cent over the next year as they absorb the additional costs of new government policies and benefit from a ready supply of workers to fill vacancies.

A survey of 1,139 employers by the CIPD, the professional body for HR managers, published on Monday found that employers plan to expand their workforces during the third quarter of 2017 but do not expect employment growth to put significant upward pressure on wages.

“Predictions of pay growth increasing alongside strong employment growth is the dog that hasn’t barked for some time,” said Gerwyn Davies, senior labour market analyst for the CIPD. “We are still yet to see tangible signs of this changing in the near term.”

Unemployment hit a 40-year low in May, when it dropped to 4.5 per cent. But wage growth continued to lag behind inflation, as it has since February.

The absence of wage pressures, despite low levels of unemployment, has continued to defy economists’ and monetary policymakers’ predictions, based on earlier experience that a tight labour market would be accompanied by rising wages.

Some respondents to the CIPD survey cited uncertainty over the UK’s future outside the EU as a factor contributing to pay restraint. However, the pattern is not a uniquely British. The US has also been experiencing robust employment growth but limited wage pressures.

The CIPD said that the absence of significant upward pressure in wages was at least in part due to continued growth of labour supply. The report points to the availability of migrant labour from elsewhere in the EU, higher labour force participation among older people, and reform to the benefit system that has incentivised people without a job to seek work.

Employers also reported that additional cost pressures as a result of new government policies were acting as a hindrance to pay growth. Nearly one in four companies said that increasing the pay of the lowest-paid staff to the higher National Living Wage level was limiting its ability to raise pay for other employees. A fifth said the government’s auto-enrolment pension scheme, which requires employers to make contributions to a pension scheme for all employees, was a challenge, and 21 per cent cited uncertainty over the UK’s future trading relationships with the EU.

Among employers who responded to the CIPD survey, the balance reporting that they expected to expand rather than reduce their workforce over the next three months rose to 27 per cent, up from 20 per cent when the survey was last conducted three months earlier. Hiring intentions have recovered markedly among public administration and defence sector employers, with the balance saying they planned to expand rather than contract their workforce rising to plus 3 per cent for the third quarter, from minus 16 per cent in the second quarter.

Employers said they expected to increase pay by 1.7 per cent on average over the next 12 months, up from 1.5 per cent when the question was asked three months earlier. But half of employers said they expected to increase employees’ basic pay by no more than 1 per cent. The Bank of England has forecast that prices will rise by 2.7 per cent over the same period.

Despite rising inflation, employees’ expectations for pay awards have moderated since last year, according to a separate CIPD survey conducted in December 2016, which showed that 55 per cent of employees said they expected to receive a pay rise in 2017, compared with 66 per cent when employees had been asked a year earlier about their expectations for 2016.

Competition for jobs continues to be fiercest for low-skilled positions, which attract an average of 24 applicants for each job. There have been on average 19 applicants for each medium-skilled position and eight applicants for each high-skilled vacancy, according to the CIPD.

The findings are based on a survey of 1,139 senior human resources professionals who completed an online survey between June 15 and July 7 on their employment, recruitment and pay intentions in the third quarter of 2017. The responses were weighted to make them representative of the UK business population.

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