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UK – Employment growth set to slow with pay lagging behind inflation

18 February 2014

The fast pace of growth in employment of recent months could be set to slow slightly, just as economic growth is taking hold, according to the latest CIPD/SuccessFactors quarterly Labour Market Outlook (LMO) 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. The latest official ONS figures show that the Consumer Prices Index (CPI) grew by +2% in the year to December 2013.

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.  
  • Recruitment intentions among surveyed 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, commented: "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." 

"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," Mr Davies concluded.  

The LMO report’s finding echo the sentiments outlined in recent Jobs Report from online recruitment search engine Adzuna’s. The company’s co-founder Andrew Hunter commented: “The recovery in the jobs market is far from over. The great news is unemployment has fallen at record levels, but wages are still stuck in a post-recession hangover – while the backlog of employees waiting for the right time to change jobs is clearing, salary levels are yet to catch up. Compared with this time last year, there are fewer people fighting it out for each position, but the chances of securing a decent salary have become slimmer.” 

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