Poor productivity explains lagging pay growth

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Productivity Freeway Exit Sign

Figures published  by the Office for National Statistics (ONS) show that the demand for labour remains strong, which includes a relatively high share of permanent, full-time jobs.

Unemployment in the UK fell by 57,000 in the three months to June, official figures show, bringing the jobless rate down to 4.4 per cent – its lowest since 1975 and down from 4.6 per cent in the previous quarter.

Average weekly earnings increased by 2.1 per cent compared with a year earlier – slightly higher than last month’s two per cent increase.

But with inflation continuing to run at 2.6 per cent, real earnings still fell by 0.5 per cent, the ONS figures showed.

At 75.1 per cent, the proportion of people in work is the highest it has been since 1971, in part due to the introduction of a later state pension age for women.

The ONS reported that the availability of work in the UK continues to attract workers from overseas, but found that the rate of increase had slowed over the past year.

 

With skills having a significant impact on productivity, David Willett, Director at The Open University, comments on how Brexit could exacerbate the skills shortage, so employers must focus on building the skills required now by drawing on the latent talent of existing employees.

”The UK’s lagging productivity is a matter of national concern. Now faced with a growing skills gap, which may be exacerbated by Brexit, it is more important that employers focus on building skills that help them to increase productivity now and future-proof them against future economic, political and technological changes.

”Instead of buying in skills, employers should focus on boosting the skills of existing employees through effective use of the apprenticeship levy and additional workplace training. The Taylor Review highlighted the need for better access to lifelong learning and by embracing this organisations will not only increase diversity and social mobility, they will gain the vital skills required to lift productivity.”

The CIPD warns that poor productivity growth remains the underlying reason why earnings remain stuck around the two per cent mark. The latest monthly figures show that the continued increase in labour supply, driven by a sharp increase in the number of 50-64 year olds (+210k over the past year), ex-welfare claimants in employment (-73k decrease in the number of long-term unemployed) and EU nationals (+126k) is also failing to put pressure on employers to put wages up in response to labour and skill shortages.

Responding to the figures, Gerwyn Davies, Senior Labour Market Analyst at the CIPD, the professional body for HR and people development said

“Predictions that wage growth would accelerate due to rising inflation and a low unemployment rate have still yet to bear fruit.  This is no surprise given today’s poor productivity figures, which continue to weigh on the pay prospects of UK workers.  However, it also seems that employers are turning to under-utilised groups of the labour market, such as ex-welfare claimants and older workers, to help offset the relatively tight labour market conditions.

“Our Labour Market Outlook survey, published on Monday, showed that many employers are still receiving a relatively high number of suitable applicants for roles, especially for low-skilled vacancies.  However, we should not overlook the fact that the UK economy is currently generating a significant number of high-skilled roles, which could lead to rising skills shortages unless employers raise their game through investment in capital and machinery, improving workforce skills and adopting smart working practices. This threat will increase if skilled workers from the EU14 and EU8 decide to leave the UK to look for work elsewhere.”

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