Private sector pay award expectations hit seven-year high

CIPD research shows short-term improvement in pay, but skills shortages look set to persist

Basic pay expectations in the private sector have soared to reach their highest point in seven years, according to new CIPD research, but skills shortages are set to persist. 

The latest CIPD Labour Market Outlook (LMO) showed businesses were expecting pay awards to increase by an average of 2.5 per cent in the first quarter of 2019, after years stuck at the 2 per cent mark.

The increase is the largest since the CIPD and the Adecco Group began tracking pay award expectations in 2012, and has been attributed in part to the effects of a tighter labour market on skills availability. 

However, while basic pay award expectations in the private sector have increased, in the public sector they have fallen from 2 per cent to 1.1 per cent. 

The LMO surveyed 1,254 employers on their pay, recruitment and redundancy intentions for the first quarter of 2019. Among organisations expecting pay to increase more than 2 per cent, two in five (42 per cent) gave inflation as the top reason, followed by the need to pay the going market rate (38 per cent).  

The LMO data also showed skills shortages continued to put pressure on wages, with two-thirds (66 per cent) of private sector firms reporting they increased starting salaries in response to recruitment challenges, up from 56 per cent the previous quarter.

However, just over a quarter (27 per cent) of public sector firms increased starting salaries, in the quarter surveyed (winter 2018), down from a high of 43 per cent in summer 2018. When responding to retention issues, private sector employers were also more likely to raise overall salaries (62 per cent) than public sector employers (34 per cent). 

Jon Boys, labour market economist for the CIPD, said public sector employers’ hands were “tied”, while private sector employers were more willing to spend money in response to recruitment and retention challenges. He called on employers to improve how managers train, develop and apply individuals’ skills at work, adding: “Employers will need to think far more creatively about how they attract, develop and retain their staff to boost both skills and productivity.”

Alex Fleming, country head and president of staffing and solutions at the Adecco Group UK and Ireland, said raising wages to attract or train staff was a “short-term fix”. Instead, it would be the employers that thought more holistically about their talent strategies that would excel. 

“Organisations that identify the skills and traits they need to prosper, streamlining their process for attracting talent and building an environment that allows talent to thrive, will be the ones who succeed,” he said. 

The LMO suggested employers were “overconfident when it comes to assessing their own productivity”, with just 7 per cent believing their organisation’s productivity was below average. This was despite more than a third of employers (36 per cent) naming productivity as a priority for their business, and half (50 per cent) using the term when discussing organisational performance. 

Tom Hadley, director of policy at the Recruitment and Employment Confederation (REC), said employers should make the business case for recruitment and people management to be the drivers of productivity. “Employers want to invest in the recruitment process, and it’s about making the business case at key meetings,” he said. 

Hadley also raised concerns SMEs “might be left behind” as bigger employers are able to invest more in recruitment and productivity innovations. Smaller employers needed to look at the longer term, he said, by increasing their brand presence and by talking to the younger generation in their communities to address future skills shortages. 

In total, seven in 10 (71 per cent) employers with vacancies reported that at least some of them were proving hard to fill, an increase from 64 per cent in the same quarter last year, indicating a tightening of the labour market. Public sector employers were more likely to have hard to fill vacancies (77 per cent) than their counterparts in the private sector (69 per cent). 

Despite the overall positive trends, Tony Wilson, director of the Institute for Employment Studies, called for caution. Brexit, he said, meant the future for employment, pay and inflation was “far from certain”. 

“If Brexit goes well, then we could start to see higher pay feeding through into higher inflation during 2019, with labour and skills shortages holding back growth,” he said. “To avoid this, we’ll need to do more to boost productivity and bring more people into the workforce – particularly older people, disabled people and parents.”

But Wilson added “all bets will be off” if Brexit goes badly, and that prospects and employment would look “far less rosy”.

Employers and government will need to be ready to respond quickly to either scenario, he said.