Mounting recruitment difficulties rather than higher cost of living now main threat

The latest quarterly CIPD/KPMG Labour Market Outlook survey, published today 14 May, finds that pay rises are set to remain modest, in spite of indications that more employers expect to award staff increases of at least 4%. The median expected increase remains steady at 3% (2.5% in the public sector). However, with employer optimism rising in all but the public sector, the threat of higher pay inflation is greater than for some time amid signs of mounting recruitment difficulties.

Dr John Philpott, Chief Economist at the Chartered Institute of Personnel and Development (CIPD), said:

ìSubstantial growth in the supply of labour in recent years, due mainly to increased immigration, has helped the economy avoid the wage spiral some had feared in the wake of the recent surge in the cost of living. But although this risk may subside in the coming months as the rate of price inflation moderates, a new threat is emerging in the shape of increased recruitment difficulties. This is particularly true of job vacancies requiring the kinds of skill or experience which migrants arenít always able to supply.

ìWhen it comes to the outlook for pay inflation, a combination of greater employer optimism, increased recruitment activity and mounting recruitment difficulties may soon become a bigger concern to the Monetary Policy Committee than any possible knock-on effects of recent higher inflation. This could have a significant bearing on how much further interest rates will have to rise.î

Andrew Smith, Chief Economist at KPMG, said:

ìThis further evidence of labour market tightening, albeit confined to particular areas, will add to concerns that the economy is operating close to capacity. Thus the MPC may feel more comfortable only when growth slows. This could well happen of its own accord as past rate increases bite ñ but, if not, it is too early to call the peak of the rate cycle.î

Key findings from the report include:
Recruitment / labour market confidence:

There has been a rise in recruitment intentions ñ with 85% of employers saying theyíll be recruiting in the current quarter. This compares to 82% in winter 2006/07 and 79% in autumn 2006.

The proportion of employers who say recruitment will lead to a net increase in headcount has fallen to 39%, suggesting a softening in the demand for Labour. However, the softening is entirely accounted for by the public and voluntary sectors. Optimism and recruitment intentions remain strong in the private sector.

The continued strong demand for labour is one contributory factor in the rising proportion of employers anticipating recruitment difficulties in the current quarter ñ which now stands at 48% (up from 46% in the previous quarter and 44% in autumn 2006).

Medium term employment optimism is improving in all sectors other than in the public sector. There is a 22% positive balance of employers expecting to employ more staff over those expecting to employ fewer in a yearís time ñ an improvement on the positive balances ranging from 13-17% in the previous three quarterly surveys. By contrast, the public sector records a significant negative balance (-20%).

Pay outlook:

Of the 40% of employers planning a pay review in the current quarter, more than a third (36%) expect pay to rise in their organisation by 3-3.5%.

There is evidence that pay expectations have risen since the last quarter, with almost a quarter 23% of employers expecting pay to rise by 4% or more, compared with only 13% last quarter. However, the median expected increase remains steady at 3% (a figure that is consistent for all but the public sector where the expected increase is 2.5%).