IDR | 06 Sep 2018

A note from the Editor

We publish the results of our pay planning survey, which looks at employers’ reward intentions for 2019, at a time when the economy and the labour market present a series of apparent paradoxes. On the one hand, economic growth is weak in comparison with previous periods, with manufacturing virtually in recession and job losses in parts of retail. Productivity growth has faltered since the crash of 2008, and business investment remains historically low.

Labour market

The Labour market on the other hand, the labour market seems to be robust, at least in terms of falling unemployment – down to 4%, a figure it last reached in the mid-1970s – and still growing employment. But there is a debate about the extent to which the labour market may have a soft underbelly. This is mostly framed in terms of how ‘underemployment’ – the extent to which employees would like to work more hours – is falling, although it is still some way above pre-recession levels, indicating that there are still areas of weakness in the labour market. Our survey results tend to support the view that the labour market is tighter, or at least tightening. More than three fifths of respondents said pay pressures were increasing, with recruitment and retention issues the main factor. We may have reached the point where it is no longer possible to reduce unemployment and raise employment without increasing wages further.

The changing make-up of the labour market in the run-up to and in the aftermath of Brexit could also be a factor here. In addition, while inflation is not as high as it has been in previous periods, it remains at moderate levels and is expected to remain so over the next period, with the possibility that Brexit could see it rise further (see forecasts on page 5 of Pay Climate). It is not surprising, therefore, that the cost of living has become more important for employers when it comes to determining the level of pay rises. These pressures could produce higher pay rises in 2019 than in 2018. We asked respondents how they thought their 2019 pay awards would compare with inflation. Just below a third thought they would be equal to the RPI with a similar proportion expecting to match the CPI/CPIH, while just over a quarter thought that pay rises would be in between the CPI/CPIH and RPI rates. If economists’ predictions are correct and the RPI is around 3% in the first quarter of 2019, we could see a third of awards at this level – with a further small proportion, 6%, above the RPI.

A further third could be worth around 2.2%, while just over a quarter could be set at intermediate levels, at perhaps around 2.6%. Overall this points to between 60% to 67% of pay awards in 2019 coming in at 2.6% or higher, with many of these at 3% or above. Meanwhile the National Living Wage will also continue to present an upward pressure at the lower end of the earnings distribution. Other issues in the year ahead include the burgeoning agenda around pay statistics reporting. Employers had to publish their gender pay gaps for the first time this year. The Commons business, energy and industrial strategy committee’s report on the new rules makes recommendations signalling extra requirements, including gaps at deciles rather than quartiles and measures to improve data accuracy. And in 2020 there will be an obligation to report the ratios between the salaries of chief executives and those of a firm’s ‘average’ worker. All this means that communicating reward practices to employees will gain in importance in the year ahead.