The latest official labour market and migration statistics, along with other forward-looking survey indicators such as the CIPD’s, provide further warning signals that rising recruitment difficulties and a higher cost of living look set to combine to drive pay inflation higher in the new year.

The official data shows that vacancies have risen to another record high in the vast majority of industries and now total well in excess of a million. And various employer surveys suggest the surge in hiring activity looks set to continue alongside a low incidence of redundancies.

EU migrant workers

This should be a cause for festive celebration. However, it will cause significant recruitment and retention challenges as it clashes with an alarming fall in labour supply; most notably older workers and EU migrant workers.

The fall in work-related migration from the EU over the past year or so is particularly dramatic. The data shows that employers now source the bulk of migrant labour from outside the EU; both via the Skilled Worker route (formerly Tier 2) - which is the main long-term work route for non-UK citizens  - and the Temporary Worker routes (formerly Tier 5).

In the 12 months to September 2021, the five most popular sources of labour for skilled worker visas are India (53k), Philippines (9k) and Nigeria (9k), the US (6k) and Pakistan (4k). In addition, a disproportionately high share (73%) of seasonal workers (formerly part of Tier 5) were given to Ukrainian citizens during the same period. The share of work-related migration from the EU has therefore slowed to a relative trickle.

The dramatic effects of the decrease in EU workers

The dramatic reduction in the inflow of EU workers will also be a big concern to the Bank of England. Substantial growth in the supply of labour from the EU has helped meet strong labour demand and minimise the risk of a ‘pay-price spiral’ over the past decade and more. However, this looks set to change; particularly for hard-to-fill vacancies in low-paying sectors where EU citizens have been disproportionately employed. Recent media stories suggest that employers in sectors such as hospitality are now locked in a highly competitive wages war. This is mirrored by recent CIPD survey data, which shows that raising wages has risen to become employers’ main response to recruitment difficulties.

And with inflation set to increase further in the first half of 2022, more workers look set to demand higher wages in a job seeker-friendly tight labour market. Indeed, this already seems to be happening. Another startling statistic from the official data was the sharp rise in the number of people who have moved from job to job, which now stands at a record high level.

Older workers

To compound matters, the supply of older workers has also fallen. As we know, a relatively high proportion of furloughed workers were older workers. However, a closer look at the data suggests that some older people have moved into inactivity and are critically not looking for work. It thus seems highly plausible that some older workers have re-thought their priorities after the pandemic and decided to pursue other non-work related activities, at least temporarily.

Next year’s challenges

2022 thus promises to be a very challenging and busy year for HR professionals as they seek to develop and retain their existing workforce to prevent or reduce skill and labour shortages. This means looking at the factors that improve retention beyond simply a competitive salary; which include the quality of line management, the availability of different types of flexible working arrangements and opportunities to develop new skills and progress. The high-performance work model offers a more in-depth robust framework in pursuit of a more engaged and productive workforce and a more attractive employee value proposition. Employers who succeed in this endeavour in 2022 will emerge as the big winners.

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