Strong labour supply undermines wage growth, finds CIPD

Continuous improvements in employment prospects could be subduing wage growth, according to the latest Labour Market Outlook from the CIPD, as employers are under “no pressure to increase salaries”.

Basic pay is expected to grow by just 1.8 per cent this year, down from 2 per cent in the previous quarter, with employers benefitting from a strong supply of labour and low inflation rates.

The quarter’s net employment balance – the difference between the proportion of employers expecting to increase headcount and those who will reduce it – increased slightly from +24 to +25.

But a significant confidence boost in the manufacturing and production sector saw the balance rise from +28 to +51, compared to the previous quarter.

Gerwyn Davies, labour market analyst for the CIPD said: “The proportion of people switching jobs remains well below pre-recession levels despite recent increases, while labour supply remains strong, especially from migrants, welfare claimants entering the labour market and older workers staying in work for longer.

“In addition, word has spread that inflation is expected to remain very low this year so it’s no surprise many employers are hitting the pause button on pay.”

When asked why employers were unable to meet the Bank of England’s inflation rate target of 2 per cent in their pay awards, private sector employers were more likely to cite having no recruitment or retention pressures (25 per cent), the national minimum wage (20 per cent) and the low rate of inflation/cost of living (15 per cent), as reasons why wage growth remained weak.

Davies said that “stable” had become the new “ambition” for both individuals and businesses, after the effects of the recession, which could go some way to explaining the UK’s productivity woes.

“Interestingly, we’re not seeing a massive backlash from employees on this [low wage growth]; who seem content with the arrangement and happy just to be in work and receiving a regular wage; even if it isn’t as high as they would like,” he said.

The CIPD is calling on the newly elected government to encourage employers to invest in skills and improve workplace productivity.

“Business investment remains strong on average, yet overall levels of training spend are falling,” Davies said.

“More employers need to re-allocate spending towards workforce development in order to deliver the productivity improvements that are essential to achieve higher levels of pay growth.”

Stewart Segal, chief executive of Association of Employment and Learning Providers (AELP), said skills and employment would continue to be a driver behind a sustained economic recovery.

“We welcome that employment and skills were at the centre of the government’s manifesto because there is a proven return on investment in these programmes in terms of the economy, business competitiveness and wage growth for people in sustainable employment,” he said.

REC chief executive Kevin Green added: “However, we need to convince the new government to adopt a sensible and balanced approach to immigration so that UK businesses can hire the talent and skills they need to succeed.”