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CIPD - UK labour market continues to strengthen, but a growing labour supply means that wage growth will remain weak

Pay rises remain subdued as 60 applicants chase every low-skilled job

The CIPD released yesterday its quarterly Labour Market Outlook report which suggests that employment will again grow strongly in the final quarter of 2014 but wage growth is likely to remain subdued.

The latest report from the professional body for HR and people development shows that near-term employment expectations have risen to a seven year high. The positive outlook can be partially attributed to fewer employers looking to make redundancies, as well as an expected continuation of the trend for many employers to be hiring new staff. This is reflected in the quarter’s net employment balance – a measure of the difference between the proportion of employers who expect to increase staff levels and those expected to decrease staff levels in Q4 2014 – which shows an increase from +23 to +30 since the Summer 2014 report (August 2014).

Private sector firms are driving much of the predicted growth in job creation, accelerating sharply to +46 from +35 on the last quarter. Public sector hiring intentions for the same period have fallen to -23 from -14, highlighting the growing polarisation between the two sectors.

Although the last year has seen very strong growth in numbers in employment, the jobs market remains challenging for jobseekers, especially those seeking lower skilled jobs. Employers reported that an average of 60 candidates applied for their last low-skilled or unskilled role advertised, compared to 50 applicants last year. At the other end of the skills scale, employers reported receiving 20 applicants for their last high-skilled vacancy, which is twice the number reported last year. Overall, employers felt that around four in ten applicants were suitable for each role on average.

These data show there is still strong competition for jobs because the labour supply is increasing. Evidence from CIPD’s report suggests, in line with official ONS employment figures, that EU migrants and older workers are key contributors to the increase in labour supply. More than a quarter of employers (26%) reported an increase in EU applicants in the twelve months to September 2014 and almost a quarter (23%) again registered more interest from workers aged 55-65. A further 8% of employers reported an increase in applicants aged over 65.

The report also finds little appetite among workers to switch employer. More than three-quarters (77%) of employees say that they aren’t currently looking to change employers. This is again consistent with official statistics which show that resignations are very low historically.

In addition to a steady supply of labour, the Labour Market Outlook also found that the proportion of employers reporting hard-to-fill vacancies is broadly unchanged (44%) and that just two fifths of these are reported as ‘skill shortage’ vacancies.

Overall, the combination of a growing number of people seeking work, reduced churn amongst the existing workforce and relative stability of skills shortages goes some way to explaining the persistence of weak pay growth.

Gerwyn Davies, public policy adviser for the CIPD said: “Predictions of pay growth increasing alongside strong employment growth is the dog that hasn’t barked for some time now, and we are still yet to see any sign of this situation changing in the near-term. The facts remain that company profitability and productivity levels are still well below pre-recession levels, while it is also clear that the majority of employers can still find suitable candidates to employ at current wage rates due to strong labour supply. Against the backdrop of very modest pay increases in the public sector and various labour costs, we need to inject a dose of realism into the trajectory of future pay expectations.

“It’s only by boosting the UK’s productivity levels that we will achieve the sustained economic growth and competitiveness we need to in order for salaries to improve. However, to do this, we need to understand the structural causes of low pay and poor productivity in the UK, and a put a greater focus on skills utilisation across all sectors. There are tentative and encouraging signs that business investment is starting to tick up, but any investment in new technology or equipment needs to be matched by investment in training in order to help managers deploy any additional resources efficiently.”

Almost half of employers report that the main reason they cannot match the inflation rate target of 2% in their basic pay awards is because the organisation cannot afford to pay it; the second major reason is labour costs, and other explanations include the cost of auto-enrolment pensions and the recent increase in the national minimum wage.

A further consideration is that public sector pay has dampened the overall picture for UK wages. Almost two-thirds of public sector employers said that average starting salaries have either remained the same or fallen in the last year. This is largely due to downgrading some roles and lowering starting salaries for others. Again, this is in sharp contrast to private sector‎ employers, just over half (52%) of which have higher average salaries compared with last year.

Download the full report here

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