New evidence low productivity is having a significant bearing on pay growth

New evidence low productivity is having a significant bearing on pay growthMost private sector workers are still not pushing for pay rises, despite falling real wages and low unemployment, according to the latest quarterly CIPD/The Adecco Group Labour Market Outlook survey. Only a quarter (24 percent) of employers in the private sector say they are under some or significant pressure to raise wages from the majority of their workforce, while almost four in ten private sector firms (38 percent) say they face no pressure at all to raise wages. The most common reason given by private sector employers (23 percent) for the lack of pressure to raise wages is a recognition among workers that the business cannot afford more generous pay increases, underlining the productivity challenge many firms face.  The survey of more than 2,000 UK employers shows a slightly higher proportion of private sector employers (36 percent) cite either some or significant pay pressure to raise wages for certain roles, particularly among high and middle-skilled jobs.

In contrast, the share of public sector organisations that are under pressure to increase wages is much higher than in the private sector, which may partly reflect the recent debate about scrapping the public sector pay cap.

Almost three-fifths (59 percent) of public sector organisations say they are under some or significant pressure to raise wages for the majority of the workforce. In addition, a quarter (25 percent) of public sector organisations say that they are under some or significant pressure to raise wages for certain roles.

The survey also suggests a significant majority of employers, apart from a few specific sectors, don’t face significant difficulties accessing the skills they need – only 13 percent of all current private sector vacancies are skill-shortage vacancies. Only a quarter (29 percent) of all employers with a vacancy report it to be from skills shortages, suggesting pay pressure is unlikely to come from a lack of skills in the current labour market.

This, together with the continuing productivity gap may help explain why employers report median basic pay increase expectations for the year ahead of just 2 percent, which, while an uptick on the previous quarter’s figure of 1 percent, is still in line with official data which show that basic wage growth has settled at between 1.8 percent-2.2 percent over the past six months.

Meanwhile, the short-term jobs picture remains positive. This quarter’s net employment balance – measuring the difference between the proportion of employers who expect to increase staff levels and those who expect to decrease staff levels in the third quarter of 2017 – remains near record high levels at +26 compared to +27 for the previous quarter.

Gerwyn Davies, CIPD Senior Labour Market Analyst, comments: “This survey provides further evidence that productivity has a far more significant bearing on pay growth than the tightness of the labour market. Over time we might expect low unemployment levels to lead to increased pressure on pay, as the Bank of England has predicted.

“However, it’s the UK’s ongoing poor productivity growth that’s currently preventing employers from paying more, not their inability to find or retain staff. This is why the Chancellor in this month’s Budget has to prioritise investments that will support workplace productivity improvements. For example, investing in support for small firms and skills development initiatives that can help to drive productivity gains over time.

“In terms of employment, despite the evident optimism in this quarter’s survey, it remains likely that the sharp increase in the number of people in work over the past year will ease during the course of 2018. This is due in part to the impact of continued slower economic growth, the uncertainties associated with Brexit and the prospect of further interest rate rises. However, employment prospects for the manufacturing sector look bright, perhaps buoyed by the benefit of a weaker currency and the strength of global demand.”

Alex Fleming, President of General Staffing, The Adecco Group UK&I, comments: “It is important to note that productivity remains as a critical and national issue for the majority of employers as well as some specific sectors, whilst some other sectors have other priorities and are focused on filling specific skills gaps which are vital to their business model’s success.

“The key takeaway is for organisations to remember that talent mapping remains prudent; organisations need to be ready to react quickly to possible future talent restrictions.”