WIREDGOV

Low inflation and higher labour costs are key drivers for slowdown

The latest quarterly Labour Market Outlook survey report from the CIPD, the professional body for HR and people development, suggests that wage inflation will fall in the year ahead. 

The CIPD’s report suggests that median basic pay rises of just 1.2% are expected in the 12 months to December 2016, compared with 2% just three months ago. The low pay growth expectations for the year ahead can be partly explained by an increase in employment costs. There has been an increase in the proportion of employers citing pension auto-enrolment, increases to the National Minimum Wage and low inflation as key reasons why they haven’t been able to afford to pay their workers a basic pay rise of 2% or above in the last twelve months. 

However, while there is a risk that wage growth will see a sharper-than-anticipated slowdown this year, the quarterly survey of more than 1,000 employers shows that the softening in pay growth hasn’t been accompanied by pessimism about jobs growth. This quarter’s net employment balance – which measures the difference between the proportion of employers who expect to increase and those that intend to decrease staff levels – now stands at +21, compared with +28 three months ago. Despite this modest fall, the data suggests that employment growth will remain robust in Q1 2016. 

Gerwyn Davies, labour market analyst at the CIPD, comments: “The feedback we’re seeing from employers suggests that official forecasts for wage inflation for 2016 are too optimistic. A significant proportion of employers have already reported increases in employment costs as reasons why they have limited pay rises in the last 12 months to 2% or less - and looking ahead these cost pressures will only increase. For example, many organisations will see further increases in labour costs as a result of the National Living Wage from April this year and the introduction of the Apprenticeship levy from April 2017. With inflation expected to remain low during 2016 and labour supply remaining strong, we shouldn’t be surprised to see pay expectations staying low. Budgets remain tight so if there are any pay rises to be given, it’s likely that employers will target financial rewards towards high-performers and those with in-demand skills that are difficult to replace, rather than the workforce as a whole.” 

Among employers that weren’t able to increase pay by 2% or more in the 12 months to December 2015, the following reasons were given:

• More than a third of employers (36%) said affordability was a key reason why they cannot be more generous. 

• The share of employers that said the current rate of inflation is acting as a brake on pay awards of 2% or more has risen to 17% from 13% over the past three months. 

• The share of employers that said that the government’s auto-enrolment pensions scheme is a factor that has limited basic pay increases to less than 2% has increased to 17% from 10%.

• 14% of employers cited the increase in the National Minimum Wage in October 2015 as a factor limiting wage growth, including more than a fifth of private sector organisations (21%) 

Looking ahead, the proportion of employers that cite an ‘anticipated continuation of the current rate of inflation’ has more than doubled to 13% from 6%.This figure includes almost one-fifth of private sector employers (18%); highlighting that a rising proportion of firms don’t feel compelled to match or raise their previous pay awards because real wages are still set to rise due to the current low level of inflation. 

Davies continues: “Weakening pay prospects further underline the need for sustainable productivity growth, which is essential for stronger pay growth. The government is introducing an Apprenticeship levy from April 2017 with the aim of encouraging more employers to invest in developing the skills of their workforce. However, there are real question marks over whether the Levy on its own will increase the amount of training and development delivered in the workplace, and in turn, the productivity gains needed to boost pay packets. The missing link in the Government’s productivity plan is a comprehensive strategy to work with employers to boost workplace productivity, including through targeted support for SMEs and campaigns to improve people management and development practice on the ground. Employers need to play their part too, especially with conditions remaining so favourable for firms to invest in training and development and upgrading the skill content of jobs.”