Wage inflation unlikely to take off as UK's flexible labour market continues to contain skills shortages and pay pressures, suggests new CIPD report

The latest Labour Market Outlook from the CIPD, the professional body for HR and people development, suggests that wage inflation is unlikely to take off in the next year due to limited skills shortages and subdued pay settlement forecasts from employers.

The quarterly survey of more than 1,000 employers shows that across all sectors just fifteen per cent of current job vacancies are proving difficult to fill. It also reveals that, outside a limited number of industries, UK employers continue to be able to recruit the workers they need without significantly hiking wages and that median basic pay rises of just 2% are predicted by employers in the 12 months to September 2016.

Steady supply of candidates

The Labour Market Outlook finds that the number of applicants per vacancy has remained steady over the past year, with average applications for jobs running at 25 for each low-skilled role, 15 for medium-skilled roles and 8 for highly-skilled roles. This suggests that in general, most businesses are seeing a steady flow of suitable candidates, despite unemployment falling to a seven-year low in October and despite a slight year on year increase (44% - 49%) in the number of employers reporting any hard to fill vacancies.

The most common employer response to hard-to-fill vacancies are up-skilling existing staff (48%), followed by hiring more apprentices (27%), recruiting migrant workers (23%) and raising starting salaries for hard to fill positions (22%).

Gerwyn Davies, labour market analyst at the CIPD, comments: "It seems that Armageddon warnings about the UK facing a skills shortage crisis understate the ability of many employers to ease their recruitment problems. Many employers have heeded previous warnings of a tightening jobs market by providing more job opportunities for young people, including through apprenticeships, while up-skilling the existing workforce. At the same time, others are using migrant workers to strengthen their defence against a tightening labour market. This flexibility in the UK labour market seems likely to help contain significant wage inflation over the next 12 months, with employers predicting median basic pay increases of 2% for the year ahead. This is despite the introduction of the National Living Wage in April 2016, which may have a big impact on overall wage bills for some organisations in certain sectors, but negligible impact on overall wage inflation.”

Skills challenges remain in certain sectors

Across all organisations reporting any job vacancies, the proportion of hard-to-fill vacancies is only modestly higher in the private sector (16%) than the public sector (11%).

Focusing on organisations reporting recruitment difficulties, the proportion of hard-to-fill vacancies is greatest in the manufacturing and production sector (24%), which includes industries such as construction and utilities, and private sector services (24%), which covers industries such as finance and retail.

Davies continues: “In some areas though, skills shortages do remain more acute. Employers that are struggling to fill vacancies should think creatively about how they can upskill the workforce. On-the-job learning, mentoring schemes and apprenticeships are cost effective ways in which both new blood and new skills can be injected into the workforce. Government also has a clear role to play in ensuring that policy does not compound any skills shortages, especially in relation to immigration where further restrictions on migrant workers look set to be introduced. There is also a danger that cuts to the further education budget may undermine the willingness and ability of employers to further invest in training their workers or enable individuals to invest in their own skills.”

Employment growth remains robust

Looking ahead, the findings point to continued, robust employment 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 – has decreased to +28 from +29 compared with 3 months ago. This shows strong employment growth with only a slight decrease in the number of employers planning to hire.

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