Pay expectations ‘at lowest levels for more than two years’

Wage inflation is predicted to fall again in the year ahead, pushing pay expectations to their lowest level for more than two years, according to the CIPD’s latest Labour Market Outlook (LMO).

The survey, with more than 1,000 employers, suggests that median basic pay rises of just 1.2 per cent are expected in the 12 months to December 2016, compared with 2 per cent just three months ago.

Low pay growth expectations for this year can be partly explained by an increase in employment costs, the CIPD said, including pension auto-enrolment, which was cited by 17 per cent of employers as the reason for limiting pay rises to less than 2 per cent.

And the percentage of employers flagging the current rate of inflation as another brake on pay awards has risen to 17 per cent from 13 per cent over the past three months.

A rising proportion of organisations, from 6 to 13 per cent, told the survey they don’t feel compelled to match or raise their previous pay awards because real wages will continue to rise as a result of low inflation.

Increases to the national minimum wage (NMW) in October 2015 were highlighted by 14 per cent of employers as a cause for limited pay growth so far.

The numbers of employers highlighting higher base pay rates as a reason for holding down wage rises are likely to grow with the introduction of the national living wage (NLW) this April, according to Gerwyn Davies, labour market analyst at the CIPD.

“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 per cent or less - and looking ahead these cost pressures will only increase,” he said.

“With inflation expected to remain low during 2016 and labour supply remaining strong, we shouldn’t be surprised to see pay expectations staying low,” he added.

The CIPD’s findings are supported by recent analysis from the CBI, which suggests that "inaction" on business rates, together with recent government policy changes, including the national living wage and the apprenticeship levy, will cost businesses around £9 billion every year by 2020-21.

Carolyn Fairbairn, director general of the CBI said the increasing cost burden on UK businesses would hamper organisations’ ability to grow and invest in its workforce.

Davies said employers would be conscious of tightening budgets, and rather than increasing wages for the workforce as a whole, would be likely to target financial rewards towards high-performers and those with in-demand skills that are difficult to replace.

He said that as pay prospects become weaker, the argument for sustainable productivity growth becomes more important because “productivity is essential for stronger pay growth”.

“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,” he added.