13 March 2015

Will pay awards remain subdued in 2015?

A special report on the labour market from the Ernst & Young ITEM Club predicts a pick-up in pay growth to 1.9% this year, delivering the first increase in real earnings since 2007, amid low inflation. Inflation has hit a record low of 0.3% and is expected to turn negative in coming months.

However, while pay growth will continue to accelerate in coming years, it will remain short of the pace achieved in the decade before the financial crisis. Wages are forecast to grow by 3.7% in 2018, still 0.7% short of the pre-crisis average.

Martin Beck, senior economic advisor to the EY ITEM Club, said: "Real earnings have fallen by nearly 10% since 2008, but predicts workers will finally see more money in their pockets this year.

"However, this is not a normal recovery. The move towards later retirement and the huge increase in the size of the workforce has depressed real wages as workers have priced themselves into jobs. We don't expect a return to boom time wage growth any time soon. Employment will continue to be strong, but wage growth will remain relatively modest."

The report predicts the UK's workforce will expand by more than 1.2 million people between 2014 and 2018, growing at an average of 0.9% a year. This is partly due to continued immigration - albeit at a slightly slower pace than in recent years as improving economic conditions at home, particularly in the eurozone, reduce incentives to move to Britain.

Another boost comes from more older people remaining in the workforce, as the state pension age rises and health levels improve. The number of people over 50 in work or looking for a job has climbed by more than 1.1 million since the end of 2009.

Despite the economic recovery and strong employment growth over the last two years, wages have struggled to catch up. Real wages have been falling consistently since 2010, the longest period for 50 years, according to the Office for National Statistics.

However, the latest official labour market data showed pay including bonuses up by 2.1% in December, confirming that the squeeze on living stands has come to an end, for the time being.

The gradual recovery in workers' pay pockets should persuade the Bank of England to raise interest rates in an equally gradual fashion, with the first hike expected early next year, the report says. At the same time, muted pay growth could be bad news for the government's deficit-reduction plans as it continues to hold back growth in income tax receipts.

Beck said: "With the pace of earnings growth continuing to lag behind pre-crisis norms, workers' pay is unlikely to be the revenue raiser that it has been in the past."

What does this mean for our industry?

The expected pay increase average for our industry last year was 2.5%, however those members that we surveyed suggested that this trend was nearer 2% by the end of the year.

We had many members who had to auto enrol into the pension scheme in 2014 and this may have had a part to play in whether a company could afford to implement a pay increase for that year.

The pay increase averages over the last few years have been:

2014 - 2%
2013 - 1.9%
2012 - 1.5%

Pay increases are still being paid on affordability within the industry, however more companies are suggesting that things are more positive and remuneration of some description will be looked at. Performance related type of awards seems to be popular and the BPIF are being asked to support members with target setting/measurement processes where they don't currently exist to assist with implementing this kind of award.

For more information or you would like to talk to Anna Stretton, BPIF HR Adviser, please contact her on Tel: 07850771028 or email: [email protected]