Given the prevailing economic uncertainties, UK employers are considering reducing pay rises for their employees over the coming year. This decision reflects the cautious approach being taken by businesses against a backdrop of slowing growth in the world’s major economies, including the UK.
Pay Rises in the UK Expected to Be Lower This Year
A recent report by UK’s Chartered Institute of Personnel and Development (CIPD) shows a downward trend in predicted pay rises for 2024. This is a significant change on previous years, as employers prepare for the smallest pay rises since the start of the influenza A pandemic (covid-19).
Highlighting developments in the UK labour market, the report shows that these are influenced by factors such as business confidence, plans to expand the workforce and inflationary pressures.
Despite an improvement in business confidence, particularly in the services sector, the number of employers intending to expand their workforce has fallen. With less competition for talent, the CIPD predicts a looser labour market, which will weaken employees’ bargaining power over pay.
Over the past year, average pay has remained stable at 5%, however, the CIPD expects this figure to fall to 4% this year, marking the first decline since the start of the pandemic. The median increase in the private sector has already fallen from 5% to 4% in the last quarter. The public sector has proved even more difficult for staff, with average agreements falling from 5% to 3%.
Impact on Workers and Employers
For wage earners, lower pay rises mean less purchasing power and disposable income, particularly in the face of rising living costs. They need to re-evaluate their budgets and expenses. Some may consider changing jobs or working part-time to supplement their income. The necessity to adapt to tighter budgets and explore alternative sources of income becomes imperative, which could lead to changes in consumer behaviour and lifestyle tweaks.
As for employers, they appear to be slowing down their hiring plans. Approximately one third of employers plan to increase their headcount over the next three months, while 10% anticipate reductions. The clear difference between employers planning to add and reduce headcount has narrowed from +26 to +22. In the public sector, almost 20% of employers intend to cut jobs.
“This is a key moment for the UK labour market. The gap between public and private sector pay expectations is widening again, while public services are coming under increasing pressure”, According to Jon Boys, Senior Economist at the CIPD.
It should be noted that these projections, which are based on an in-depth analysis of the market, represent an average for all business sectors. Nevertheless, individual companies may deviate from these estimates due to factors such as their financial strength, market position, talent retention strategies and general industry dynamics. In particular, companies that are in a strong position with steady growth may choose to offer more generous salary increases to retain top talent and strengthen their competitive advantage.
How the Slowing UK Economy Is Impacting Wage Growth
The uncertainty of the United Kingdom’s economy, particularly inflation rates, is having a significant influence on employers’ cautious approach to pay rises. With inflation, the general upward trend in prices over time, the purchasing power of money falls precipitously. At times of high inflation, companies face increased production and operating costs. Hence, employers diligently adjust their salary increase expectations in order to preserve the financial integrity of their establishments.
The world economic landscape also influences employers’ decisions on pay rises. Linked economies mean that events and trends in one part of the world can have repercussions elsewhere. The uncertainties associated with international trade tensions, geopolitical factors and the post-global pandemic recovery are making employers cautious. Consequently, they are favouring stability and financial prudence, which is reflected in revised salary increase forecasts.
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