Employers’ expectations of pay awards have risen to a new high of 5%, according to the latest Labour Market Outlook from the CIPD.
This is the highest expectation of median base pay rise recorded since the HR body began running the survey in 2012. It said it was driven by managers struggling to fill vacancies and attempting to keep up with high rates of inflation.
Although this is a record high, it sits at around half of the current consumer prices index (CPI) measure of inflation, which is 10.5%. It echoes XpertHR’s findings in January, which suggested 5% pay awards could become ‘the norm’ in 2023.
Expectations of pay rises in the public sector lag behind at 2%, amid ongoing industrial action in many public services, the CIPD found.
According to the outlook, 55% of employers said they expect to raise base or variable pay further in 2023 so they can recruit and retain staff. Seven in 10 said they expected to hire in the next three months, although 57% said they had vacancies that were hard to fill.
The tight labour market is likely to continue well into this year, with 29% expecting hard-to-fill vacancies to be a significant problem this year, and 36% saying they would be a minor problem.
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Among those who intended to increase wages to attract staff, 57% said they would raise prices so they could do so, while 47% believed they could absorb the costs. The CIPD said this is in contrast to 12 months ago, suggesting employers will increasingly feel the financial pinch of raising pay levels.
Other common responses to a tight labour market included upskilling existing staff (47%), increasing the duties of existing staff (36%), improving job quality (27%) and hiring more apprentices (26%). Striking sectors such as education and healthcare were more likely to spread duties around existing staff.
Steve Herbert, wellbeing and benefits director at &Partners, said that while the hike in anticipated pay offers was “a much needed increase for so many working households, it won’t fundamentally solve the cost-of-living crisis for employers and employees as it’s a real-terms decrease not an increase”.
He added that CPI inflation does not include increases in mortgage or rental costs, something that will put pressure on many families as rates go up this year.
“It’s worth pointing out that in real terms UK employees have not generally had a pay rise since the financial crisis of 2008,” said Herbert. “The average household could just about absorb (say) a 1% decrease in earnings each year during this period, but this has left them increasingly financially exposed. As a result, there was very little financial padding to help employees absorb that sudden spike in inflation last year.”
He added that it was “concerning” that more than half of employers plan to fund pay rises by increasing their prices.
“This could then hard-wire inflation into the system,” he said. “That said, there is very little choice for employers here, as they too have been trying to absorb price rises and labour costs since the financial crisis, as well as the spike in energy costs last year.”
The CIPD urged the government to reform the apprenticeship levy to make it more flexible and enable employers to invest in a wider range of training options.
Jon Boys, senior labour market economist for the CIPD, said it was positive that so many employers were hiring apprentices or upskilling employees, but that a more flexible apprenticeship levy would offer “much-needed support”.
Last week, the government announced plans to make apprenticeships more prominent to candidates, as young people will soon be able to use the degree applications platform UCAS to search for schemes that interest them, but there are no current plans to reform the levy itself.
“Many employers are recognising the potential to attract certain groups to fill vacancies – particularly older workers, carers and those with health conditions – but this also requires a focus on improving job quality, particularly flexibility,” said Boys.
“The forthcoming introduction of a day-one right to request flexible working should prompt more employers to ensure that they advertise jobs as flexible and provide a range of flexible working practices to attract and retain a more diverse workforce.”
He added that employers needed more support, particularly small businesses, to retain these older workers and keep them healthy through access to occupational health services.