Employers experience ‘supply shock’ as migrant labour trends go into reverse gear

Latest quarterly Labour Market Outlook report shows employers are experiencing worsening skills and labour shortages while pay is stuck in 'middle lane' for most workers

Employer plans to take on more staff are being hit by worsening skills and labour shortages, partly as a result of a sudden reversal in the growth in the number of both EU and non-EU migrants in employment in the UK.

This is the conclusion of the latest quarterly Labour Market Outlook from the CIPD and The Adecco Group, based on a survey of 1,002 employers, which shows that while the short-term outlook for employment remains strong, labour and skills shortages are accelerating.

The survey’s net employment balance – a measure of the difference between the proportion of employers who expect to increase staff levels and those who expect to decrease staff levels – has remained extremely positive at +22 (compared to +23 in Q3 2018).

However, among employers which currently have vacancies, seven in ten (70%) report that at least some of their vacancies are proving hard-to-fill, higher than in Summer 2018 (66%) and Spring 2018 (61%). 

In addition, over two in five of all employers (44%) report that it has become more difficult to fill vacancies over the past 12 months at their organisation, while over a third (34%) of employers say that retention pressures have risen during the same period.

This situation is being exacerbated by a relatively significant drop in the number of both EU and non-EU migrants that are employed in the UK. According to the latest official data, the number of non-UK-born workers in the UK decreased by 58,000 between Q2 2017 and Q2 2018, compared with an increase of more than a quarter of a million (+263,000) from Q2 2016 to Q2 2017. Contrary to the popular narrative, the labour supply shock is being driven primarily by falling interest from migrants from outside the EU. The number of non-EU-born workers in the UK decreased by 40,000 between Q2 2017 and Q2 2018, compared with an increase of almost a quarter of a million (225,000) during the same period in the previous year.

Looking ahead, labour supply looks set to be further constrained from 2021 when migration restrictions for EU citizens are introduced, especially for lower-skilled workers.

In particular, employers express concern that the main route for recruiting EU citizens to fill lower-skilled roles that was recently proposed by the Migration Advisory Committee won’t be enough to satisfy their recruitment needs. One in ten (10%) employers that currently employ EU citizens report that extending the Youth Mobility Scheme to EU nationals post-Brexit would meet their recruitment needs to a large extent for medium and low-skilled roles.

In addition, a third (33%) of employers who employ non-EU citizens say that the administrative burden of using the current points-based system for non-EU citizens system, which will most likely be adopted for EU citizens from 2021, is too great. Around a quarter (26%) say that the salary threshold is too high and a fifth (20%) of employers say that the cost implications of the current system are also too high.

No movement on pay except for new starters and key staff

While demand for labour remains strong, overall, employers report median basic pay increase expectations for the 12 months to September 2019 of just 2%. However, the squeeze on skills is having a clear impact on many employers’ pay decisions:

• Around half of organisations (48%) that have experienced increased difficulty recruiting staff during the past 12 months have increased starting salaries in response. More than a quarter (27%) have done so for the majority of vacancies, while around a fifth (21%) have done so for a minority of vacancies.

• Among organisations that have experienced increased difficulty retaining staff over the past 12 months, just over half (51%) have increased salaries, with 28% raising salaries for the majority of staff and 23% doing so for key staff only.  Almost half of employers (47%) have not raised salaries at all in response to rising retention difficulties, highlighting the wider productivity challenges and cost pressures facing many organisations.

Gerwyn Davies, Senior Labour Market Analyst for the CIPD, the professional body for HR and people development comments:

“The data implies that the pendulum has swung away from the UK as an attractive place to live and work for non-UK born citizens, especially non-EU citizens, during a period of strong employment growth and low unemployment. This has heightened recruitment difficulties for some employers. It also underlines the risk that more non-UK-born citizens and employers will be discouraged from using the post-Brexit system if more support is not provided and it is not made simpler, fairer and more affordable; especially for lower-skilled roles. 

“Against the backdrop of a tight labour market, failure to do this will heighten recruitment difficulties and could lead to negative consequences for existing staff, such as higher workloads, and loss of business or orders for firms. It’s vital that businesses understand the workforce challenges they face, and make the relevant investment in skills and adopt the right people management practices to boost productivity in their organisation.”

Alex Fleming, Country Head and President of Staffing and Solutions, The Adecco Group UK and Ireland, added:

“The labour market in the UK is tight and this research is reporting increasingly high levels of recruitment and retention difficulties. While the data is not showing wages rising across the board, we are regularly seeing this pressure being exerted in the recruitment space.

"Our clients are often surprised at the market rates when they are making talent-attraction decisions. This ‘supply shock’ and other pressures will only serve to increase these difficulties, which could easily flow out into the rest of the workforce. In turn, this could cause a wider upward movement on wages.

"Employers should be aware that wages are not the only answer – as for in-demand employees, marginal salary gains may not be what they most desire. We’ve seen wider benefits packages, which include flexible working and a good culture often win over a simple increase in salary.”

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