Ken Mulkearn | 09 Sep 2019

Pay Climate 18 Editor's Viewpoint

Thoughts on reward turn to 2020 and beyond

Brexit dominates the airwaves but the coming issue in the minds of those concerned with pay is recruitment and retention. This is now the second most important factor when it comes to deciding pay rises, according to our survey of employers’ intentions for 2020, with 80% of respondents regarding it as important or very important. Recruitment and retention is up some eight percentage points on last year’s ranking, from 72%, and it has narrowed the gap on affordability which, while it remains at the top of employers’ list of key factors, dropped five points from 98% to 93%.

This fits with a labour market which remains tight overall and is characterised by specific skill shortages in a number of areas. But the latest official figures indicate a further fall in the number of vacancies, a potential sign that the labour market could yet be on the turn, so perhaps this is a good moment to consider what might be the competing upward and downward pressures on pay over the coming period.

The main issue on the downside is the possibility that Britain’s departure from the EU could come in the form of a ‘hard Brexit’, with a concomitant impact on jobs and trade, and probably pay as well. But even if the UK avoids this outcome, the global economy looks to be slowing, something that is not normally auspicious for the prospects around reward. In such a context, the cooling of the labour market is likely to gather pace. Indeed, anecdotal evidence from conversations we have conducted with employers recently indicate that many organisations are finding it hard to tempt workers who are preferring to stay put in the current risky climate.

But potential upward pressures persist. After a likely dip in the coming autumn, inflation is set to moderately increase as we move into 2020. This is notwithstanding most economists betting that a deal with the EU is the most likely outcome of the current set of on-again, off-again talks. As noted previously, the convergence between the National Minimum Wage and the voluntary living wage is raising the floor for pay and producing knock-on effects on differentials with staff who supervise those on the lowest rates. And even if the labour market headwinds freshen, we could see the emergence of a ‘Goldilocks’ economy, with skills shortages persisting in certain ‘hot’ spots, whether these are jobs, locations, sectors or sub-sectors, while other areas cool off.

The other upward pressure – or the removal of a downward pressure at least – that has emerged since we last published is the ending of the limit on public sector pay rises. The latest outcomes for the main public sector groups are centred on 2.5%, much the same as in the private sector, and just like the latter, some groups have received more. For instance, the main grade of prison officers benefitted from increases of 3%, and the lowest rank in the armed forces saw their pay go up by 6%. The minimum for teachers in Wales rose by 5% and now the Government says it plans to deal with serious teaching supply issues in England by raising the starting salary from the current £23,720 to £30,000, a total increase of over 26%.

On their own, these moves may not succeed in ameliorating the serious recruitment and retention difficulties faced by many parts of the public sector. And against this should be considered the downward pay pressures presented by the continued drift towards privatisation in areas like the NHS, but nevertheless the marked shift in public sector pay policy brings to an end a lengthy period where many of the largest employers in towns around the country were holding pay down. This could have an effect in the private sector as employers there feel the pressure to keep up. After all, many private sector workers have partners who work in the public sector and vice versa.

Brexit uncertainty may yet tell when it comes to workers’ pay expectations, but the same factor could also feed inflationary pressures, if sterling fares badly on foreign exchange markets and boosts the price of imports. In fact, the two considerations are closely linked in our survey, with the future business outlook third in the rankings for factors influencing pay rises, at 77%, and inflation just behind on 75%.

Which of these potential upward or downward pressures weighs heaviest in the balance as we move into 2020 will depend not just on Brexit and the wider global economy, but also on the continued reactions of the different economic actors – mainly employers but also employees, and let’s not forget the Government, whichever administration that turns out to be in these febrile times.