Pay rises remain subdued, as unemployment is at a record low

New research suggests that employment in the UK will grow strongly in the third quarter of this year but wage growth is likely to remain weak.

The latest study of more than 1,000 employers suggests that near-term employment expectations have risen compared with the previous spring report (May 2017).

This is reflected in the quarter’s net employment balance (a measure of the difference between the proportion of employers who expect to increase staff levels and those who expect to decrease staff levels in Q3 2017), which shows an increase from +20 to +27 during the past three months.

However, employers continuing to hire isn’t, necessarily, an indication that they are convinced of a bright economic future, rather that nothing significant has changed in recent months, says Alex Fleming of The Adecco Group UK&I.

“Many employers are getting on with the day-to-day hiring required to keep their businesses ticking along until they have enough information to build concrete recruitment plans,” he says.

Wage growth

According to the CIPD/The Adecco Group Labour Market Outlook, the basic pay award expectations for the next 12 months remain at just one per cent. The subdued basic pay award outlook can be attributed to a range of reasons, it says.

Against the backdrop of poor productivity growth, the report points to an increase in labour supply over the past year as a key factor behind the modest pay projection. This is driven by relatively sharp increases in the number of non-UK nationals from the EU, ex-welfare claimants and 50-64-year olds; although the report says the future migration trends appear highly uncertain.

Employers report a median number of 24 applicants for the last low-skilled vacancy they tried to fill, compared with 19 candidates for the last medium-skilled vacancy and eight applicants for the last high-skilled vacancy they were seeking to fill.

Overall, employers felt that around half of applicants were suitable for each role they were recruiting for. The variation across skill level is also consistent with labour market trends which show that high-skilled occupations account for a large share of the number of jobs created during the past year in contrast with the low proportion of low-skilled jobs that have been generated.

Private sector

Almost a quarter of firms in the private sector cite delivering the National Living Wage (23%) as a brake on pay growth, a further fifth (21%) cite uncertainty over access to the single market, and a fifth (21%) reference the Government’s auto-enrolment pensions scheme as acting as a challenge.

More than a fifth of firms (21%) also report that affordability is weighing pay down, underlining the urgent need to address weak productivity growth in the UK. Meanwhile, around three quarters of public sector employers (72%) say that restraint in the public sector is the main reason why they cannot match the inflation rate target of 2% in their next basic pay award.

Employee expectations

Recent research also suggests that employee pay expectations are weaker this year compared with last year, which may suggest that employers are not coming under any additional pressure to raise pay from workers, despite the low unemployment rate.

Looking back, the median for all basic pay decisions that were undertaken in the first six months of 2017 is 1.5%, says the report. This may imply that employers have become more pessimistic about basic pay growth over the past six months against the backdrop of a slowing economy, says Gerwyn Davies, senior labour market analyst for the CIPD.

He says that the good news for job seeker is that the labour market ‘continues to go from strength to strength’, however, he says: “The facts remain that productivity levels are stagnant, public sector pay increases remain modest while wage costs and uncertainty over access to the EU market have increased for some employers.

“At the same time, it is also clear that the majority of employers have still been able to find suitable candidates to employ at current wage rates due to a strong labour supply until now,” says Davies.

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