The latest quarterly UK Labour Market Outlook from the CIPD and The Adecco Group, based on a survey of 2,001 employers, shows that while the short-term outlook for employment in the UK remains strong, labour and skills shortages are finally starting to bite:

• Demand for labour remains robust, but labour supply is failing to keep pace.
• The number of EU-born workers in the UK increased by just 7,000 between Q1 2017 and Q1 2018, compared with an increase of 148,000 from Q1 2016 to Q1 2017. This represents a fall of 95% and has fed into employers reporting skills and labour shortages.
• Tightening labour market is feeding through to recruitment pressures. The number of applicants per vacancy has dropped across all roles since summer 2017.
• New starters and key staff are more likely to be getting a salary increase. Wage growth for the wider workforce is set to remain at around 2% for the foreseeable future.

Recruitment pressures are building

The strong demand for labour is finally increasing recruitment pressures for employers. The growth in labour supply is failing to keep pace with labour demand, exacerbated by a ‘supply shock’ of far fewer EU nationals going to the UK. The fall of 95% in EU-born workers going to work in the UK has fed into a tightening of the labour market, evidenced from skills and labour shortages reported by employers:

• Two in five employers (40%) report that it has become more difficult to fill vacancies over the past 12 months, owing to a combination of fewer applicants and less suitable applicants.
• Organisations with hard-to-fill vacancies report that the density of hard-to-fill vacancies is higher now (40%) in their organisation compared with three months ago (30%).
• Employers received an average (median) of 20 applicants for the last low-skilled vacancy they tried to fill, compared with 24 candidates in summer 2017 and 25 candidates in autumn 2015.
• On average, employers received an average (median) of 10 applicants for the last medium-skill vacancy they tried to fill, compared to 19 applicants in summer 2017 and 15 applicants in autumn 2015.
• Employers received a median number of six applicants for the last high-skilled vacancy they tried to fill, compared with eight applicants in summer 2017 and eight applicants in autumn 2015.

No movement on pay except for new starters and key staff

While demand for labour is continuing, median basic pay expectations in the 12 months to June 2019 remain at just 2%, and mean basic pay expectations have only risen slightly, from 2.1% to 2.2% in the last three months.

However the squeeze on skills is having a clear impact on many employers’ pay decisions. Half of organisations (53%) that experienced increased difficulty recruiting staff during the past 12 months have increased starting salaries in response.

Where organisations experienced increased difficulty retaining staff over the past 12 months, just over half (55%) have increased salaries, with 30% raising salaries for the majority of staff and 25% doing so for key staff only.

The CIPD is pointing to the UK’s continued productivity crisis as a key factor behind employers’ inability to raise wages across the workforce. Gerwyn Davies, senior labour market analyst for the CIPD, comments:

“The most recent official data shows that there has been a significant slowdown in the number of EU nationals coming to work in the UK over the past year. This is feeding into increasing recruitment and retention challenges, particularly for employers in sectors that have historically relied on non-UK labour to fill roles and which are particularly vulnerable to the prospect of future changes to immigration policy for EU migrants. With skills and labour shortages set to worsen further against the backdrop of rising talk of a ‘no deal’ outcome with the EU, the need for the Government to issue consistent, categorical assurances about the status of current and future EU citizens, whatever the outcome of the negotiations, is more important now than ever.”

“Despite the declining unemployment rate, it seems that the downward pressure of persistently weak productivity growth is dominating any upward pressure on pay from labour and skills shortages. The battle for productivity growth and higher wages in the UK will be won or lost in our workplaces. Poor skills development, skills mismatches, lack of worker autonomy and inadequate management all have a significant impact on people’s productivity at work, which affects organisational performance and employers’ ability to increase wages.”