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Rising business costs to put brake on wage rises

Wage inflation is likely to fall this year with average pay rises of 1.2% expected during 2016, according to HR body the CIPD.

These are the findings of the CIPD's latest quarterly Labour Market Outlook survey report. It says that median basic pay rises of just 1.2% are to be expected in the 12 months to December 2016, compared with 2% three months ago.

The low pay growth expectations for the year ahead are largely due to an increase in employment costs, it says. There has been an increase in the proportion of employers citing pension auto-enrolment, increases to the National Minimum Wage (NMW) and low inflation as key reasons why they haven't been able to afford to pay their workers a basic pay rise of 2% or above in the past twelve months.

Among those employers that weren't able to increase pay by 2% or more in the 12 months to December 2015, the following reasons were given:

  • 36% of employers cited affordability;
  • 17% of employers said inflation is acting as a brake on pay awards (up from 13% in the past three months);
  • 17% said auto-enrolment pensions have limited pay rises to less than 2% (up from 10%); and
  • 14% of employers cited the increase in the National Minimum Wage (NMW) in October 2015.

However, the survey shows that the softening in pay growth hasn't been accompanied by pessimism about jobs growth. This quarter's net employment balance - which measures the difference between the proportion of employers who expect to increase and those that intend to decrease staff levels - now stands at +21, compared with +28 three months ago. Despite a modest fall, the data suggests employment growth will remain robust in Q1 2016.

Gerwyn Davies, Labour Market Analyst at the CIPD, said: 

"A significant proportion of employers have already reported increases in employment costs as reasons why they have limited pay rises in the last 12 months to 2% or less - and looking ahead these cost pressures will only increase."

He added: 

"With inflation expected to remain low during 2016 and labour supply remaining strong, we shouldn't be surprised to see pay expectations staying low. Budgets remain tight so if there are any pay rises to be given, it's likely that employers will target financial rewards towards high-performers and those with in-demand skills that are difficult to replace, rather than the workforce as a whole."

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