CIPD predicts tighter labour market and continued poor productivity next year

There is little evidence that the pay squeeze will end soon, with only falling inflation likely to lead to meaningful wage increases next year. This is according to a CIPD analysis, which predicts that 2018 will see pay, productivity and migration top the agenda as the UK looks ahead to its exit from the European Union. It adds that the UK workforce could tighten, and with increased constraints on labour supply, 2018 could be the year that the UK finally runs out of people to fill jobs, despite unemployment levels being unlikely to see much change. There are also indications there will be no improvement in productivity, with continued stagnation in UK productivity, which will remain well below pre-crash levels. In the CIPD’s annual labour market predictions, Ian Brinkley, Acting Chief Economist, anticipates a flattening of employment growth and weak pay growth as the UK continues to struggle with its productivity problem.

He said:“In 2017 we saw record-high employment but a big squeeze on household budgets; the next 12 months looks to be a case of more of the same. With Brexit negotiations entering their next crucial phase, all eyes will be on the ability of the Government to ensure employers can access the skills and workers the economy needs. Workers will also be hoping that pay rises faster than inflation, but that may not happen until much later in the year.”

On the UK labour market:

“The year will end with more people in work than ever before but there are signs that we may have hit peak employment. The latest ONS figures point towards constraints in the overall supply of labour so 2018 could be the year when the UK finally runs out of people to fill the jobs in the economy. However, there is little sign of excess demand for jobs, so it is possible that unemployment levels will remain broadly the same over the next 12 months.”

On pay:

“There is little evidence the squeeze on wages will end anytime soon, though the national minimum wage will see some workers get an uplift. Most employers can’t afford to or don’t feel the need to make an above-inflation pay rise. People hoping to see more money in their pocket in 2018 should hope inflation returns to nearer its 2% target, a level it is predicted to be approaching at the end of 2018. Even if we do see any growth in real earnings, this will be nowhere near enough to make up for the consistent falls in real earnings we have seen for most of the last decade.”

On migration:

“Until now, we have been able to supplement labour supply through net migration, which is why the UK workforce has kept growing. However, recent falls in net migration post-referendum suggest that this may not be a long-term solution. Any adjustment is likely to be slow and steady rather than a cliff-edge scenario where supply disappears overnight.  It is worth noting that the number of EU-migrants coming to the UK for work purposes has remained broadly consistent with the pre-Brexit average, so there is evidence that the effect of Brexit on migration may not be as significant as predicted. Sectors that are highly reliant on migrant labour, such as hospitality and agriculture, will be nervously watching the Brexit negotiations to see whether they are likely to get the favourable migration deals they want in order to meet their labour supply.”

On productivity:

“There is nothing to suggest that there is a long-termproductivity recovery underway, despite the figures in the last quarter being better than expected. While productivity may pick up a little over the next 12 months, we will still face productivity outcomes well below pre-crash levels this time next year. To avoid low productivity becoming an entrenched, long-term problem, the government needs to look at its underlying causes. This includes what is preventing many UK organisations from investing as much as their international counterparts on training and ways to improve people management, especially in SMEs.”