Increase in labour costs could spark inflation rise, warn experts

Employers must ‘focus on productivity’ to ensure sustainable growth after average cost of wages jumps 4 per cent in a year

The average hourly cost of labour in the UK has grown 3.8 per cent on last year, official figures have shown, raising concerns that productivity needs to increase to make rising costs sustainable.

Figures from the Office for National Statistics (ONS) found the average hourly value of labour sat at £20.20 in the months from July to September, up from £19.50 the same time last year.

Hourly labour costs measure all the costs to businesses of having an employee on the clock. This is mostly made up of salaries and benefits, but also includes costs not paid to the employee, such as tax and pension contributions.

Wages were the biggest contributor to this increase, jumping 4 per cent over the year, compared with non-wage costs such as sick pay and national insurance contributions, which saw a 2.8 per cent rise over the year.

Jon Boys, labour market economist at the CIPD, said that while the increase in earnings might be a cause for celebration among workers, it also risked creating inflation in the economy. “If you're a worker it's nice to see wage growth for the first time in a while,” he said. 

“But labour costs are one of the biggest costs to businesses and if [employers] then have to pass on those costs to your customers, you get inflation,” said Boys, adding that increasing productivity was one way inflation could be avoided.

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Boys advised employers to concentrate on the productivity of the workforce by focusing on training and people management practices, and particularly emphasised the importance of investing in line managers to get the best out of all their employees.

He added that businesses could also look at non-financial incentives for staff, such as better recognition for achievements, better working conditions and flexible working arrangements, and said wage growth needed to be sustainable to bring long-term benefits for workers.

“It's nice to have a pay rise, but what's really nice is a 3 or 4 per cent pay rise every year for 20 years,” said Boys. “The thing that makes sure it's going to be sustained is the productivity and, in the absence of that, this is probably not good.”

The ONS figures showed total labour costs were higher in the public sector compared with the private sector, with an average hour of labour in the public sector costing £22.80 compared with £19.70 in the private sector.

Non-wage contributions such as pensions made up a higher proportion of public sector labour costs, at 18 per cent of all costs, compared with 15 per cent in the private sector. 

Labour costs also ranged considerably across industries, with average hourly labour costs in finance and insurance sitting at £45. The industry with the second highest labour costs was mining and quarrying, at £33.90.

In contrast, the hospitality sector saw an average hourly labour cost of just £10.70, with wage costs amounting to £9.60 per hour.