In its most recent inflation report, the Bank of England predicted that the past tightening in the labour market is likely to lead to greater upward pressure on wage growth; which it has consistently argued is one of the key factors that would determine whether to raise interest rates or not. The Monetary Policy Committee raised interest rates for the first time in 10 years in the same report, which is curious since the gradual tightening of the labour market has not led to rising wages over the last two years.

What’s more, the latest Labour Market Outlook survey findings suggest that there is little cause for getting out the bunting. It suggests that wage growth expectations for the year ahead have strengthened modestly over the past three months, but remain subdued. Median basic pay expectations in the 12 months to September 2018 for the private sector remain unchanged at 2%, which is consistent with official data which show that basic wage growth has settled at between1.8%-2.2%.

However, perhaps the more interesting data reveals some of the reasons why wages have failed to keep pace with inflation and respond to a low unemployment rate. These include weak wage pressure from staff, limited skills shortages and low productivity. For instance, almost two-in-five private sector firms say that are under no pressure to increase wages for their staff. The most common reason given by private sector employers (23%) for the lack of pressure is a recognition among workers that the business cannot afford generous pay increases, underlining the productivity challenge many firms face. According to the most recent official data, productivity has fallen for the second consecutive quarter, and it should come as no surprise that wage growth has not risen given the close relationship between pay growth and productivity in the UK:

It remains to be seen, therefore, whether employers will be able to meet even modestly higher pay expectations if productivity improvements fail to materialise between now and the time of their next basic pay award.

What we’re seeing, therefore, is that it is the UK’s ongoing poor productivity growth that is preventing employers from paying more, not their inability to find or retain staff. This is why, in the CIPD’s view, the Chancellor should have prioritised investments that will support workplace productivity improvements in last week’s Budget. And, as the CIPD recommended in its budget submission to HM Treasury, investing in support for small firms and skills development initiatives is essential to help to drive productivity gains over time. The evaluation report of our People Skills pilot scheme shows that the provision of quality, locally delivered HR support for SMEs will go some way to tackling the productivity challenge gripping the UK economy. While our submission was not taken on board by the Chancellor on this occasion, the CIPD does continue to meet with policy makers to demonstrate the vital role HR can play in improving productivity just when the UK really needs it.

About the authors

Gerwyn Davies, Labour Market Adviser

Gerwyn is the CIPD’s Public Policy Adviser for a wide range of labour market issues. With lead responsibility for welfare reform, migration and zero-hour contracts at the CIPD, Gerwyn has led and shaped the policy debate and achieved substantial national media coverage through various publications. These include Zero-hours contracts: myth and reality (2013) and The growth of EU labour: assessing the impact on the UK labour market (2014). In addition Gerwyn authors the institute’s high profile and influential quarterly Labour market outlook report. Gerwyn is an experienced labour market commentator, making regular appearances in the national media and on other public platforms, including several appearances before the House of Commons Work and Pensions select committee.

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