The Labour Market Outlook, produced in partnership with The Adecco Group UK & Ireland, is one of the most authoritative employment indicators in the UK. 

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Labour Market Outlook: Spring 2018

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The quarterly Labour Market Outlook, produced in partnership with the The Adecco Group UK & Ireland provides a set of forward-looking labour market indicators highlighting employers’ recruitment, redundancy and pay intentions. The survey is based on responses from 1,008 employers. Additionally, this report also considers the extent to which the tightening in the UK labour market is hampering employers’ ability to find staff and putting modest upward pressure on wages.

The Adecco Group UK&I is part of The Adecco Group, the world’s leading workforce solutions partner. As a global Group, we provide more than 700,000 people with permanent and flexible employment every day. With more than 33,000 employees in 60 countries – 3,000 in the UK&I – we transform the world of work one job at a time. Our colleagues serve more than 100,000 organisations with the talent, HR services and cutting-edge technology they need to succeed in an ever-changing global economy. As a Fortune Global 500 company, we lead by example, creating shared value that meets social needs while driving business innovation. Our culture of inclusivity, fairness and teamwork empowers individuals and organisations, fuels economies, and builds better societies. These values resonate with our employees, who voted us number 2 on the Great Place to Work® - World’s Best Workplaces 2017 list. We make the future work for everyone.

The Adecco Group is based in Zurich, Switzerland. Adecco Group AG is registered in Switzerland (ISIN: CH0012138605) and listed on the SIX Swiss Exchange (ADEN). The Group is powered by eight lead brands: Adecco, Modis, Badenoch & Clark, Spring Professional, Lee Hecht Harrison, Pontoon, Adia and YOSS.

The Adecco Group UK&I’s head office is in London, United Kingdom. We have 10 brands, including The Adecco Group UK&I, Adecco, Ajilon, Badenoch & Clark, Modis, Office Angels, Penna, Pontoon, Roevin and Spring.

Executive summary

Employment

This survey points to continued growth in demand for labour in Q2 2018, which will lead to a further tightening of the UK labour market for employers. This quarter’s net employment balance – which measures the difference between the proportion of employers who expect to increase staff levels and those who expect to decrease staff levels in the second quarter of 2018 – has increased to +26 from +16 over the past three months. The measure is at its highest level since it was introduced in the winter 2012/13 report.

The survey data is consistent with official labour market data, which shows that employment growth remains strong while the number of vacancies in the UK economy remains well above historical average levels. However, the positive employment picture contrasts with disappointing first quarter GDP growth estimates for 2018 of just 0.1%, which, alongside other economic indicators, point to lower economic activity.

In addition, the strong demand for labour is not being matched by labour supply, which has also been affected modestly by a relatively abrupt slowing in the growth rate of EU nationals coming to the UK over the last 12 months. 

The surprising degree of optimism amongst employers therefore poses a conundrum to our understanding of the current state of the UK labour market and economy. One explanation is that the recent agreement between the UK Government and the EU at the March Council meeting may have ended uncertainty for some employers in the short to medium term. The settlement gives EU citizens that arrive during the transitional period the right to stay here indefinitely if they stay here for a continuous period of five years and ensures that free movement of labour and the existing trading arrangements will continue during the transitional period from March 2019 to December 2020. This development could therefore be good news for labour demand and supply.

A second factor may be that employers will need more people to employ because of changing demographics. According to the Bank of England, overall labour supply is expected to fall in the coming years, partly due to an increasing proportion of older workers, who tend to work fewer hours. At the same time, EU nationals tend to work longer hours than UK workers. Taking these two factors together, potential labour supply is projected to grow by less than the recent average, which may increase demand for workers.

From a sector perspective, the depreciation in the pound may also be helping to boost industries where employment growth looks particularly strong in Q2, such as business services (+35) and manufacturing (+38). Nonetheless, the sectoral data is consistent with official figures, which show that employment levels in manufacturing are growing modestly following a relatively long period of decline. Employment growth in healthcare (+20) also looks set to grow in the short term, building on the sharp growth in the number of people employed in this sector in recent years.

The high degree of optimism amongst employers about short-term employment prospects suggests that recruitment expectations are at present being more strongly influenced by changing demographics, more certainty about the status of current and future EU citizens and the recent strength of the global economy than by recent indications that the UK economy may be slowing. However, employer optimism is likely to weaken if the current slowdown persists.

Pay

According to the survey data, growth in basic pay awards is projected to remain broadly consistent with recent reports. Median basic pay increase expectations in the 12 months to March 2019 are 2%, which is consistent with recent LMO reports. However, average basic pay award expectations during the same period have risen to 2.1% from 1.8%. This is consistent with other survey indicators that also suggest an increase in wage growth or settlements.

The pay trends in this report have broadly mirrored those in the official data, which show that earnings growth has remained subdued in recent years. This is despite predictions from many commentators and institutions that pay would accelerate, for example the Office for Budget Responsibility predicted that wage inflation would reach 3.5% in 2016, but the actual level of wage increases during the year remained closer to the 2% indicated by the CIPD Labour Market Outlook.

However, the latest official average weekly earnings (AWE) measure, which shows that earnings (excluding bonuses) have increased by 2.8% over the past year, has started to diverge somewhat from the LMO pay indicator. 

The gap could be the latest example of a false dawn of pay optimism. However, given the historical relationship between pay and productivity growth, the recent strengthening of pay growth is consistent with a recovery in productivity growth over the past two quarters.

In addition, it may also be partly explained by the limitation of basic pay awards to capture the extent to which employers are offering higher pay to key or new staff and overtime. As official data shows, the job-to-job flow rate, which measures the degree of churn in the labour market, has rebounded to pre-recession levels following a prolonged period where movement between jobs was subdued. Various survey indicators suggest that the earnings of those who are moving jobs are higher than those who don’t because employers are offering higher wages. This is partly reflected in this report, which shows that the incidence of hard-to-fill vacancies has increased during the past couple of years. Overall, more than three in five (61%) employers report that at least some of their vacancies are proving hard to fill among employers who currently have vacancies. In addition, more than a quarter (28%) of employers are raising wages to help tackle their recruitment difficulties. Taken together, the data in the report and other evidence suggests that as employment continues to grow, the tightening of the labour market may now be starting to create more pressure on employers to raise pay.

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