UK employers are planning to give pay rises of just 1% this year, the lowest increase for more than three years, reports the Chartered Institute of Personnel Development.

Demand for workers is strong, but companies are reporting problems filling vacancies. A “passive attitude” towards development and training is blamed together with government initiatives such as the auto-enrolment scheme and the apprenticeship levy.

A CIPD/The Adecco Group survey of 1,000 employers (The Labour Market Outlook: Spring 2017) suggests the UK economy is about to be hit by a fall in basic pay awards and real wages.

According to the survey data, employers’ median basic pay expectations in the 12 months to March 2018 have fallen to 1% compared to 1.5% three months ago, which is lower than at any time during the past three and a half years.

However, demands for workers remains “robust”, particularly in the manufacturing and production sector, but companies are also having particular difficulty filling vacancies.

Gerwyn Davies, labour market adviser at the CIPD, said: “The good news in this latest survey is that employment confidence remains positive, with sectors like manufacturing and production proving particularly buoyant.

“The bad news is that there is a real risk that a significant proportion of UK workers will see a fall in their living standards as the year progresses, due to a slowdown in basic pay and expectations of inflation increases over the next few months.

“This could create higher levels of economic insecurity and could have serious implications for consumer spending, which has helped to support economic growth in recent months. 

“The weak pay data is no surprise given the continued weak productivity growth in the UK.

“However, this is being exacerbated by many employers’ passive attitude towards workforce development and training, despite reporting hard-to-fill vacancies.

“At the same time, private sector employers are proving stubbornly unresponsive to labour market changes that should, in theory, act to increase wages, such as the number of unfilled vacancies.

“The data suggests that the introduction and increase of various labour costs, such as the Government’s auto-enrolment scheme and the apprenticeship levy may be part of the explanation.

“It’s crucial therefore we see a pick-up in employer investment in workforce skills development to support and sustain productivity growth.”

The survey also found that around two-thirds (68%) of organisations are planning to recruit employees in the next three months and almost half (45%) of vacancies in the manufacturing sector are for new roles, reflecting optimism amongst employers.

Average weekly earnings: regular pay

Average weekly earnings (regular pay) - CIPD May 2017

Further findings from the CIPD report include: 

  • Of firms that plan to award basic pay increases of less than 2% in the year ahead, which includes those who are planning to freeze or decrease pay, more than a fifth (21%) of private sector firms say that rolling out the Government’s auto-enrolment scheme is a key factor behind their failure to award a more generous basic pay increase. Meanwhile, more than four-fifths (83%) of public sector establishments from the same cohort cite restraint on public sector pay.
  • More than half of employers (56%) report they currently have difficulty filling vacancies in their organisation. 
  • Almost one in five (18%) employers that report that they’re having difficulty filling vacancies do not fund any training activity. 
  • A similar proportion say that they are not adopting any measures to improve the talent pipeline of their workforce.
  • Almost a quarter (24%) of organisations are planning to make redundancies in the next three months, modestly up from 22% in the previous report. 
  • 12% of private sector firms say the UK’s decision to leave the European Union has led them to consider relocating some or all of their business operations abroad. Popular relocation destinations include the Republic of Ireland (18%), Germany (17%) and France (13%).