The fast pace of growth in employment of recent months could be set to slow slightly, just as economic growth is taking hold. That’s according to the latest CIPD/ SuccessFactors quarterly Labour Market Outlook survey of almost 1,000 employers.

The benchmark survey reveals that, although recruitment intentions remain positive, the rate of increase has slowed significantly and the vast majority of organisations expect to give pay awards below the current rate of inflation (CPI*). According to the CIPD, this reflects a “productivity hangover” affecting UK employers who have maintained and increased employment over a sustained period of falling output.

The report’s net employment balance, which measures the difference between the proportion of employers that intend to increase total staffing levels and those that intend to decrease total staffing levels in the first quarter of 2014, has fallen to +16 from +24 since November 2013. More specifically, the report finds that:

  • Optimism is higher in the manufacturing and production (+34) sector than the services sector (+21).
  • Positive employment expectations are reported in the north of England (+7) and the south of England (+10).
  • SMEs are significantly more positive about their employment prospects (+40) than large employers (+5).
  • Almost three quarters of employers (71%) say that they will be awarding pay increases of 2% or less in the 12 months to December 2014. CPI inflation grew by 2% according to the latest official statistics.
  • Recruitment intentions among LMO employers have fallen to 54% from 65% during the past three months. This is the lowest proportion planning to recruit staff since the LMO survey began. In addition, around one in five employers plan to make redundancies in Q1 2014, which is also equal to the lowest level since the survey began.

Excluding bonuses, average basic pay is predicted to increase by 2% in the 12 months to December 2014, up on the figure of 1.6% forecast last quarter. The median basic pay increase is also expected to be 2%. These modest increases in pay intentions will be welcomed by those concerned about falls in the standard of living – but with the UK’s productivity performance still a major cause for concern, it seems unlikely that this marks the beginning of a period of sustained real wage increases. The report finds that almost three quarters of organisations surveyed intend to award at most a 2% increase in the 12 months to December 2014 – below the current rate of inflation.

Gerwyn Davies, the CIPD’s Labour Market Adviser, comments: “Employment growth, normally a lagging indicator of recovery, seems to have preceded the stronger signs of growth we’re now seeing. So it is unsurprising that employment intentions are now dipping just as economic growth seems to be taking hold, with employers needing to tackle the major productivity hangover affecting the UK economy.

“Weak productivity partly explains why a majority of employers expect to continue awarding below inflation pay rises for their workforce. Sustainable increases in real wages can only be delivered if organisations can boost productivity, for example through smart investment in the training, development and management of their staff.

“The continued high level of recruitment intentions among small firms – far exceeding those of their larger counterparts – is welcome. As these small firms seek to grow rapidly it is important they are equipped to hire the right people and to rise to the management challenges associated with growth. Policy makers are rightly focused on supporting this important ‘engine room’ sector of the UK economy – and the CIPD is supporting the Government’s Growth Voucher pilot to provide enhanced business development support, for example in people management, training and development. It is critical that we ensure these growing firms buck the UK’s enduring weak productivity trend.”

Davies continues: “However, although the immediate jobs outlook remains bright, it looks as though the vast majority of workers will at best experience a standstill in real earnings. The challenge for managers will be to find ways to continue motivating employees who find their pay lagging behind inflation, and in many cases are struggling to pay bills and mortgages.”

Neil Pickering, Director at Kronos comments: “In the difficult economic climate, many businesses were focused on retaining staff during the downturn which is why many accepted lower staff productivity levels. However as the economy has begun to improve and business has picked up again, companies need to drive greater productivity in the workforce, and one of the key ways to effectively achieve this is through employee engagement.

“Far from being treated with confidence and respect, employees can often feel they are considered mere cogs in the machine, which in turn has an impact on productivity. The overall result is one of a trudging, uninspired workforce with no desire to contribute in spirit to the success of the business. In fact, our recent Forgotten Workforce report showed that employers are getting simple business processes wrong, such as underestimating the number of people needed for a specific shift (48%). Also, only a quarter of workers suggested that their employer is very good at ensuring the right people are in the right place at the right time. For front-line workers this directly impacts their ability to do their job and is a contributing factor to their disengagement from the business.

“Rather than simply prolonging this vicious circle, companies need to focus their attention on engaging their front line staff in a way that maximises productivity and business agility without undermining job satisfaction. Simple steps like creating a stronger dialogue with employers and ensuring there is the correct number of people available for each shift can improve productivity levels as well as increasing job satisfaction. Those organisations that have a well-balanced workforce, managed by a fit-for purpose workforce management system, should have no problem overcoming challenges concerning people, processes and productivity.”