UK employers’ basic pay increase expectations over the next 12 months have fallen for the first time since Spring 2020, according to the latest Labour Market Outlook by the Chartered Institute of Personnel and Development.

Having held steady at 5% for more than a year, UK employers expected basic pay increases for the year ahead have fallen to 4%, marking the first fall in pay expectations since the start of the pandemic.

The median expected basic pay increase in the private sector has fallen from 5% to 4% since the last quarter while pay expectations in the public sector have fallen further from 5% to 3%.

CIPD’s report also found that fewer employers expect their workforce to grow than in previous quarters.

The net employment balance – which measures the difference between employers expecting to increase staff levels in the next three months and those expecting to decrease staff levels – remains positive but has fallen from +26 last quarter to +22 this quarter – the lowest overall level since winter 2020/21. This is because net employment intentions have fallen in the public sector to +6, the lowest level in the public sector since summer 2019. They remain strong at +27 in the private sector.

The positive net employment balance is driven by employers looking to hire staff (33%), with one in 10 looking to decrease total staff levels. Half (52%) look to maintain their current staff level.

However, many employers (38%) continue to report hard-to-fill vacancies and 21% of respondents expect significant problems filling roles over the next six months.

Early data suggests that to fund higher wage costs, employers are no longer accepting lower profits. Of employers who’ve had to raise wages over the past six months or plans to in response to hard-to-fill vacancies, fewer this quarter (37%) are taking lower profits, absorbing costs, or accepting higher overheads, compared to the past year.

Meanwhile, recruitment intentions remain strong. Overall, 67% of employers plan to recruit in the next three months, rising to 82% of public sector employers.

The level of employers who anticipate problems in filling vacancies over the next six months has fallen from 29% twelve months ago to 21% this quarter, indicating further easing in recruitment in the coming months.

CIPD’s report also showed that 38% of employers said they have hard-to-fill vacancies, rising to more than half (51%) of public sector employers. The level of employers in the private sector with hard-to-fill vacancies is significantly lower at 34%.

Jon Boys, senior labour market economist for the CIPD, said, “We’ve seen a sustained period of high wage growth in response to a tight labour market, and high inflation pushing up the cost-of-living. Pay growth has helped individuals but it leaves employers with a higher wage bill to cover.”

“To see a sustained return to growth, there needs to be a real focus on boosting productivity by investing in workplace skills and technology,” Boys said. “It’s also in employers’ interest to communicate with employees their wider benefits package and improve job quality to compensate if they are planning to reduce base pay increases. The cost-of-living crisis is not over for many workers so finding other ways to help them besides pay, such as providing flexible working where possible to reduce commuting or childcare costs can make a big difference.”

“Investing in skills and training, people management and productivity gains will be fundamental in helping organisations to become future-proof and better able to weather economic headwinds when they come,” Boys said.