CIPD warns that increases in productivity required to drive real wage growth will take longer to arrive than expected

 

Commenting on the Chancellor of the Exchequer’s Autumn Statement and the accompanying economic forecast from the independent Office for Budget Responsibility, CIPD Chief Economist Mark Beatson said: “On paper, it’s been a good year for the UK economy but as today’s Autumn Statement and OBR forecasts make clear, finding long-term solutions to the UK’s productivity conundrum remains by far the greatest challenge facing our economy today.

“Despite the fact that the economy has grown faster than expected and employment growth is expected to be the highest we’ve seen since 1988, company profitability and productivity levels are, generally, still well below pre-recession levels and look set to stay there for some time. It’s only by boosting the UK’s productivity levels that we can deliver sustained improvements in wages and international competitiveness.

“There is no silver bullet for the productivity puzzle the UK is currently facing, but one area where there is a blind spot in current policy thinking is the role that improvements in workplace practices can play in enhancing productivity. We need a fundamental review of UK skills policy to capitalise on current investment in skills, to better understand how to help boost demand among employers for greater investment in skills and to improve how skills are used in the workplace.

“An essential starting point is closer collaboration between policy-makers, workforce representatives, employers and education in order to agree, disseminate and drive best practice. A focused forum or Workplace Commission that brings these stakeholders together to formulate a deeper collective understanding of challenges and how they can be overcome would be a valuable step in developing real and lasting solutions to the UK’s productivity problem.”

On pay, Beatson continues: “The OBR appears not to have made any change in its assumptions about the underlying rates of employment growth and labour force participation to take account of the increased dynamism we have seen in the labour market and unemployment is forecast to bottom out at 5.2% in 2016 before increasing slightly. As a result, the forecast underestimates the amount of spare capacity there is in the labour market among those out of work and looking, such as benefit claimants, the over 50s and migrants. In addition, there are ‘underemployed’ people who are looking for a job with more pay. Due to this strong supply of labour at current salary levels, we think it will take longer than the OBR expects before enough employers feel compelled to pay more, and certainly before it begins to show up in higher average earnings growth. If average earnings grow faster than inflation at all in 2015, it will be because inflation is below target, not because of higher pay growth”.

On economic growth, Beatson adds: “The OBR expect growth to slow down a little in 2015, in line with other forecasters. Unsettled conditions in the Eurozone could act as a brake on UK firms because of our close trade links. It might take longer for the Bank of England to start raising interest rates because there is still spare capacity in the labour market and any increases in 2015 are likely to be very small, but after such a long period of stability the effect on consumer spending is uncertain. How many consumers have made their financial decisions on the assumption that interests rates have to go up at some point and how many haven’t?”

On the abolition of National Insurance contributions for businesses taking on apprentices, Katerina Rudiger, Head of Skills and Policy Campaigns for CIPD said: “We welcome the measures in the statement encouraging businesses to invest in apprenticeships. However, equally important as making any changes to National Insurance contributions is the need to incentivise schools to promote apprenticeships more strongly as a pathway into work, and more generally, to improve links between business and schools and colleges to help prepare young people for work. The CIPD’s Learning to Work programme does exactly that, making the business case for organisations to invest in young people and bringing HR practitioners with their knowledge of the workplace together with young people to improve their employability.”

Full press release on www.cipd.co.uk

 
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