A tale of two workforces is emerging in the UK, according to the latest Labour Market Outlook from the CIPD. The report highlights an increasing pay divide between companies that can now afford to increase wages by 2 percent or more and those that are stuck in a pay freeze.

The latest Labour Market Outlook highlights how almost half of the UK workforce has seen either a pay freeze or a pay cut (3% pay cut, 39% pay freeze) in the twelve months to December 2014. In contrast, a similar proportion (40%) have received a pay increase of 2 percent or more and less than a fifth (18%) fall in the middle ground of people who have received a pay increase in the 0.1-1.99% corridor.

Almost half of private sector firms (48%) said that they gave a basic pay increase of at least 2% during the same period, including more than half of manufacturing and production firms (54%). However, during the same period, more than a third of manufacturing and production firms (35%) froze pay. Meanwhile, the services sector portrays a very similar hour-glass figure in terms of the distribution of basic pay awards. While almost half of services companies (47%) awarded a basic pay increase of 2 percent or more in the 12 months to December 2014, more than a third (35%) imposed a pay freeze.

It is no surprise that public sector employers (54%) are most likely to report awarding a pay freeze in the 12 months to December 2014 and SMEs (45%) are similarly restrained.

Gerwyn Davies, Labour Market Analyst for the CIPD said:

“The figures show a clear gap between employees that have comfortably exceeded the current inflation rate in their pay packets and those who haven’t seen any increase at all. What’s interesting is that this gap exists within sectors, with a significant proportion of employers able to afford a 2 percent or above pay increase and a significant proportion of organisations in the same sector imposing a pay freeze.

“It comes down to what businesses can afford, and productivity lies at the heart of an organisation’s ability to increase real wages above the rate of inflation. Evidence in our report shows a clear correlation between employers that state they have adopted a high value business strategy (as opposed to a low cost strategy) and those that were able to afford to pay a pay increase of 2 percent or more.

“Our report implies that the difference within sectors between companies that can afford to pay a decent pay rise and those that are continuing to freeze pay lies partly in the quality of leadership and management and level of workforce investment. There is evidence that organisations that have more sophisticated product market strategies are more likely to have adopted more advanced human resource management strategies characterised by more progressive people practices and greater workforce investment.

“Therefore, the role for government is not to cajole business into giving more generous pay awards on the back of stronger economic growth and lower costs, but to understand the levers that can help more firms increase their workplace productivity and move up the quality chain. This includes supporting businesses to improve management practices and encouraging greater investment in skills and the effective utilisation of skills”.

Looking ahead, the anticipated median basic pay award in the 12 months to September 2015 remains unchanged at 2 percent although public sector predictions continue to lag behind, predicted to be 1 percent, compared to 1.5 percent in the voluntary sector and 2 percent in the private sector. This static picture highlights that there is still little overall upward pressure on salaries, but encouragingly, more employers expect to at least match the inflation rate target in the year ahead. Over half (55%) predict that they will award basic pay increases of 2 percent or more. However, employer uncertainty about future pay growth is underlined by the relatively high proportion of employers that are not able to make a prediction about the year ahead.

As well as identifying a growing pay divide, the Labour Market Outlook also suggests that employment confidence is set to remain strong over the next three months. 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 decreased to +24, which is six percentage points lower than the +30 reported in Autumn 2014. This modest fall is mainly due to a sharp fall in employment intentions from +49 to +28 in the manufacturing and production sector.

Private sector firms will continue to drive most of the jobs growth (+38), and there was a particularly robust performance from the financial sector (+38). Roughly two thirds of employers (65%) plan to recruit employees in the next three months and hiring intentions are strongest in healthcare (79%), accommodation and food services (72%), arts, entertainment and recreation (72%) and financial, insurance and real estate sectors (70%). Employer confidence is highest in the Midlands and the lowest in Wales, which reports no employment growth at all in the first quarter of 2015. Despite having less ability to increase wages at this time, SME employers are much more confident about employment prospects (+44) compared to larger employers (+15).