Tight labour market falls to lift pay, but National Living Wage and inflation are providing a modest boost

While the short-term outlook for employment remains strong, labour and skills shortages are starting to bite in UK sectors which employ a high number of EU nationals, according to the latest Labour Market Outlook from the CIPD and The Adecco Group.

The report suggests that, despite a near record number of vacancies (748,000 according to the latest ONS data), UK employers are struggling to fill roles with the right candidates as a result of both labour and skills shortages. 

Official ONS data and the Labour Market Outlook suggest that a fall in the supply of EU nationals may be playing a key role. The official data (ONS: Jan 2017) shows that low-skilled sectors which typically employ a large number of non-UK nationals from the European Union are facing particular recruitment challenges, with vacancies in retail and wholesale, manufacturing, health and accommodation, and food services making up almost half (45%) of all vacancies. 

The Labour Market Outlook, a survey of more than 1,000 employers, found that that the most common response to labour shortages has been to leave the positions empty, reflecting the tightness of the domestic labour market and tentative signs that the UK is attracting and retaining fewer EU nationals. The report also shows that as many as one in four employers (27%) have seen evidence to suggest that non-UK nationals from the European Union were considering leaving their organisation and/or the UK in 2017. 

This is consistent with official data, which suggests that the growth in the number of non-UK EU nationals in employment in the UK has slowed sharply in recent months. The figures are not seasonally adjusted – so some caution should be attached to drawing firm conclusions from the data – show that the number of non-UK nationals from the European Union almost halved from an average of more than 60,000 per quarter in the nine months to June 2016 to just 30,000 in the three months to September 2016.

The public sector is set to be severely impacted by the risk of a drop in EU labour, with 43% of education and 49% of healthcare sector employers surveyed in the Labour Market Outlook saying they believed EU migrants among their workforce were considering leaving their organisation and/or the UK in 2017. 

Despite there being a significant slowdown in the number of EU nationals coming into the UK, and the threat of some leaving, more than a quarter (27%) of employers which employ EU nationals are still unsure of how many EU nationals they employ in their workforce. 

Gerwyn Davies, Labour Market Adviser for the CIPD, the professional body for HR and people development, comments: 

The most recent official data suggest that there has been a significant slowdown in the number of non-UK nationals from the European Union in work in the UK. This is creating significant recruitment challenges in sectors that have historically relied on non-UK labour to fill roles and who are particularly vulnerable to the prospect of future changes to EU immigration policy. With skills and labour shortages set to continue, there’s a risk that many vacancies will be left unfulfilled which could act as a brake on output growth in the UK in the years ahead.

“Employers need to start collecting data about their workforce and review their approach to workforce development and training to avoid a squeeze on skills and the workforce. Employers in sectors like retail, hospitality and care, will need to work much harder to attract candidates and combat labour shortages by improving the attractiveness of their jobs through better line management and job design, developing closer links with local educational institutions and improving pay and employment conditions where possible.

The report also asked employers that employ EU nationals how they would respond to migration restrictions. A quarter (26%) said they would ‘pay the difference’ and absorb the extra cost of recruiting EU nationals, whilst others said they would seek to retain older workers (19%), invest more in training and up-skilling (17%), recruit more apprentices (17%) and look for UK-born graduates (16%).

John L. Marshall, CEO of The Adecco Group UK & Ireland, said: 

“The big decisions that Britain took last year are beginning to show in the UK labour market. It is encouraging that some employers are beginning to look to new solutions for their future workforce with investment in retraining and apprenticeships, but many more need to begin this planning and investment in their workforce. Whilst the outcome of Brexit negotiations is still uncertain, employers’ access to EU migrant workers is likely to change. Investing in young people is a solid long-term strategy, but employers also need to face the facts and prepare for a situation where they might lose access to significant numbers of skilled EU workers in the near future.”

Despite challenges with labour shortages, this has not acted to push pay up significantly. However, there have been modest signs of improvement. According to the Labour Market Outlook, median basic pay expectations have risen to 1.5% from 1.1% compared to last quarter for the year ahead. 

The recent rise in inflation is one of the key reasons that seem to be putting pressure on employers to improve pay. This was a key factor for 28% of employers awarding a basic pay rise of 2% or more, compared to just 17% in the previous quarter. Long-awaited productivity improvements and the National Living Wage are other factors that are boosting basic pay awards of some employers (these were factors for 34% and 21% of employers respectively).

Pay expectations are highest in manufacturing and production (2%) and services (2%), and lower in the public sector (1%), which is still experiencing pay restraints.

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