Tight labour market and upward wage pressures predicted for 2005 bringing new challenges for HR

Although employment growth will be slower in 2005, the labour market will remain tight, ensuring employers will have to continue to work hard to drive up productivity and to look to migrant labour and those on long-term incapacity benefits to resist upward pressure on wages. This is one of the key findings of a detailed analysis of the world of work in 2004 and a forecast of what 2005 has in store for employers, published today by the Chartered Institute of Personnel and Development, the leading professional body for those involved in the management and development of people.

The report pulls together the results of five annual tracking surveys covering different aspects of people management, along with a series of four quarterly surveys of key employment data and a further five individual surveys. Taken together the fifteen surveys secured responses from over 10,000 employers, between them employing millions of employees across the UK.

Commenting on the key trends in 2004, on which his predictions for 2005 are based, Dr John Philpott, CIPD Chief Economist, said: Low unemployment and ongoing high levels of demand for labour are focusing the minds of employers on workforce issues. Recruitment and retention have been big problems this year, so employers have adopted a combination of measures to hang on to existing staff, while widening the net when recruiting, often bringing in overseas workers to fill vacancies.

It is unusual that wage inflation has remained steady in these circumstances, suggesting employers are turning to other HR solutions to attract, retain and motivate the people needed to deliver their business objectives.

A review of the world of work in 2004
The report identifies the following key employment indicators from 2004, taken from the CIPDís respected portfolio of benchmarking employer surveys:

Employers have experienced significant problems recruiting suitably qualified and/or experienced candidates to fill vacancies in 2004 - 85% of employers reported such difficulties.

The proportion of employers experiencing problems retaining staff jumped from 72% in 2003 to 77% in 2004. Employers responded by improving induction processes (60%) and enhancing learning and development opportunities (50%) - only 38% have turned to wages as a method of tackling retention problems.

The number of redundancies fell in 2004 compared to 2003. In 40% of cases where redundancies do occur, total head count afterwards was either the same or higher - indicating a growing trend for redundancies to be part of restructuring rather than downsizing.

The most detailed survey of the extent of sickness absence in the UK workplace revealed that short periods of absence are adding up to a real headache for employers. Nearly two-thirds of all absence was made up of spells lasting less than five days. But these spells contributed to an average level of annual sickness absence in the UK of over nine working days per employee - rising to 10.7 days per worker in the public sector.

An in-depth survey amongst long-hours workers (people actually working over 48 hours per week) revealed no overwhelming support for EU efforts to end the UK opt-out from the working-time directive. Seven out of 10 long-hours workers said they chose to work the hours they worked - only three in ten felt compelled to do so.

Looking ahead to 2005
Dr Philpott, uses the report to forecast some of the key employment trends expected to unfold during the year, including:

The prevailing economic climate will see a rise in the total level of employment of between 150,000 and 200,000 - less than in recent years.

Manufacturing job losses will fall, but there will be no net job creation.

Ongoing record low levels of unemployment will ensure even the moderate growth in employment forecast will increase pressure on an already tight labour market, leading all employers to seek to adapt their people management practices to increase productivity in order to contain rising cost pressures.

The increased emphasis on productivity and performance will be most noticeable in the public sector, as employers seek to deliver the efficiency savings identified by the Gershon review published in June 2004.

Higher productivity will curb net job creation in the short-run, but this trend may well be countered by greater job creation as employers tap new sources of labour supply, such as immigrant labour and the economically inactive - both of which have the capacity to limit wage pressures.

Dr Philpott said:

Employers are having to work hard to prevent the tight labour market forcing up wages. With no sign of an easing in the labour market, better people management, bringing improved productivity is the key to resisting upward pressure on wages. Immigrant labour and efforts to get more people off long-term sickness absence and back to work also offer a safety valve, allowing continued growth in employment and output without forcing up wages and prices.

Although the increase in employment in 2005 will be slower than in recent years, there is no sign of a contraction in the economy.

Challenges for HR in 2005

Dr Philpott identifies the following key challenges for people management and development professionals in 2005:

* Obtain greater value for money from reward budgets.
* Improve recruitment and retention practices without increasing costs.
* Shift the balance of training activity from programme delivery to supporting and facilitating the learning process.
* More effectively reorganise working methods, and help line managers get better at delivering on a high-performance people management agenda.
* Increase the efficiency of HR systems and processes.
* Better measure the effectiveness of HR policies and the HR contribution.
* Raise the standards of employee communication, involvement and engagement.

Dr Philpott said:

With no sign of the labour market easing, human resources professionals will need to work hard in 2005. Across the public and private sectors they will be expected to implement policies and practices that secure more from existing workers, deliver an edge in the war for talent without increasing the costs of recruitment, improve efficiency and help to achieve business objectives. The evidence from 2004 suggests there are solid foundations to build on, and that HR professionals are ready for the task that lies ahead.