Pay rises set to stick at 2 per cent for most workers, but the tightening labour market is boosting earnings of some key staff and new starters
The latest quarterly Labour Market Outlook from the CIPD and The Adecco Group, based on a survey of 2,001 employers, shows that while the short-term outlook for employment remains strong, labour and skills shortages are finally starting to bite.
The report reveals that demand for labour remains robust, but labour supply is failing to keep pace and that the tightening labour market is feeding through to recruitment pressures. The number of applicants per vacancy has dropped across all roles (low, medium and high-skill) since summer 2017
New starters and key staff are more likely to be getting a salary increase. Wage growth for the wider workforce is set to remain at around 2 per cent for the foreseeable future
During the past three months, the 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 – has decreased slightly to +23 from +26 in Q3 2018. Employment growth looks set to be particularly strong among business services (+37), transport (+38) and construction (+38) firms. Looking at the regions, employment confidence is highest in London (+31) and the South West of England (+30), and lowest in the North East of England* (+10) and the West Midlands (+13), with Scotland matching the UK average of +23.
Recruitment pressures are building
However, the strong demand for labour is finally increasing recruitment pressures for employers. This is because the growth in labour supply is failing to keep pace with labour demand, exacerbated by a ‘supply shock’ of far fewer EU nationals coming into the UK. According to the latest official data, the number of EU-born workers in the UK increased by just 7,000 between Q1 2017 and Q1 2018, compared with an increase of 148,000 from Q1 2016 to Q1 2017. This represents a fall of 95 per cent and has fed into a tightening of the labour market, which is being seen through skills and labour shortages being reported by employers:
Employers received an average (median) of 20 applicants for the last low-skilled vacancy they tried to fill, compared with 24 candidates in summer 2017 and 25 candidates in autumn 2015
On average, employers received an average (median) of 10 applicants for the last medium-skill vacancy they tried to fill, compared to 19 applicants in summer 2017 and 15 applicants in autumn 2015
Employers received a median number of 6 applicants for the for the last high-skilled vacancy they tried to fill, compared with 8 applicants in summer 2017 and 8 applicants in autumn 2015
Among employers who currently have vacancies, two thirds (66 per cent) report that at least some of their vacancies are proving hard-to-fill, higher than in Spring 2018 (61 per cent) and Spring 2017 (56 per cent). Organisations with hard-to-fill vacancies report that the density of hard-to-fill vacancies is higher now (40 per cent) in their organisation now compared with three months ago (30 per cent)
Two in five employers (40 per cent) report that it has become more difficult to fill vacancies over the past 12 months, owing to a combination of fewer applicants and less suitable applicants in broadly equal measure
No movement on pay except for new starters and key staff
While demand for labour is continuing, median basic pay expectations in the 12 months to June 2019 remain at just 2 per cent, and mean basic pay expectations have only risen slightly, from 2.1 per cent to 2.2 per cent in the last three months.
The squeeze on skills is having a clear impact on many employers’ pay decisions. Half of organisations (53 per cent) that have experienced increased difficulty recruiting staff during the past 12 months have increased starting salaries in response. A quarter (24 per cent) have done so for the majority of vacancies, and a further quarter (28 per cent) have done so for a minority of vacancies.
Among organisations that have experienced increased difficulty retaining staff over the past 12 months, just over half (55 per cent) have increased salaries, with 30 per cent raising salaries for the majority of staff and 25 per cent doing so for key staff only. More than four in ten employers (42 per cent) have not raised salaries at all in response to rising retention difficulties, highlighting the wider productivity challenges and cost pressures facing many organisations.
The CIPD is pointing to the UK’s continued productivity crisis as a key factor behind employers’ inability to raise wages across the workforce. Gerwyn Davies, senior labour market analyst for the CIPD, the professional body for HR and people development, comments:
“The most recent official data shows that there has been a significant slowdown in the number of EU nationals coming to work in the UK over the past year. This is feeding into increasing recruitment and retention challenges, particularly for employers in sectors that have historically relied on non-UK labour to fill roles and which are particularly vulnerable to the prospect of future changes to immigration policy for EU migrants. With skills and labour shortages set to worsen further against the backdrop of rising talk of a ‘no deal’ outcome with the EU, the need for the Government to issue consistent, categorical assurances about the status of current and future EU citizens, whatever the outcome of the negotiations, is more important now than ever.”
“Despite the declining unemployment rate, it seems that the downward pressure of persistently weak productivity growth is dominating any upward pressure on pay from labour and skills shortages. The battle for productivity growth and higher wages in the UK will be won or lost in our workplaces. Poor skills development, skills mismatches, lack of worker autonomy and inadequate management all have a significant impact on people’s productivity at work, which affects organisational performance and employers’ ability to increase wages. To help address this ongoing challenge, the Government needs to ensure its Industrial Strategy has a much greater emphasis on supporting improvements in leadership, people management capability and skills development, particularly through the provision of better support for small businesses at a sector and local level.”