Stalling UK wage growth set to revive debate over migrant workers

Average pay growth for Britain’s workers is likely to stall at about 2% in 2016, as the ready availability of migrants makes it easy for employers to fill vacancies, according to a forecast of the labour market.

In its annual assessment, the Chartered Institute for Personnel and Development (CIPD), which represents the human resources profession, says job creation will remain strong over the next 12 months, but wage growth has reached a plateau.

Its assessment of UK earning prospects are less bullish than those of the Bank of England and the government’s independent forecaster, the Office for Budget Responsibility. Both expect average pay to expand by about 3.5% in 2016, helping to rebuild living standards dented by the long post-recession pay squeeze.

But the CIPD says that while up to 400,000 jobs are likely to be created the next year, there is little evidence of a skills shortage, making it difficult for workers to demand generous pay rises.

Mark Beatson, the institute’s chief economist, said: “Our research shows that most employers remain confident about recruitment going into 2016 and most say they have a choice of suitable candidates for most positions.

“With record levels of net migration into the UK increasing the supply of labour, it doesn’t look like we’re going to see a skills crunch any time soon. Our research shows pay expectations for the year ahead centred on a 2% increase.”

With inflation close to zero, and expected to bounce back only gradually in the new year, that would still deliver a rise in living standards for workers. But with average weekly earnings still 9% below 2008 levels in real terms, the CIPD’s forecasts suggest it is likely to be some time before real incomes recover to pre-crisis levels.

Danny Blanchflower, a labour market expert and former member of the Bank’s monetary policy committee (MPC), said: “I think the CIPD’s right. The labour market is slowing, and what we have got is pressure pushing down on wages: from the unemployed, from the underemployed, [and] by the potential flow of migrants from central and eastern Europe.”

Official figures show the number of non-UK nationals in the workforce has surged from 986,000 in 1997 to 3.22 million – a rise from 3.7% of the workforce to more than 10%.

Almost three-quarters of the employment growth in the past year was accounted for by non-UK citizens, according to official figures. The number of non-UK nationals working in the UK increased by 326,000, compared with a 122,000 increase in the number of UK workers.

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Expectations of modest pay growth in 2016 come despite the imminent introduction of the “national living wage”, which will see the national minimum wage for the over-25s increase by 50p an hour, to £7.20, in April.

Beatson said that together with the apprenticeship levy, which larger employers will have to pay from 2017, and pension auto-enrolment, the national living wage would push up costs for employers. “With inflation close to zero, some employers will try to manage these costs by restricting pay rises for their better-paid employees,” he added.

Weaker-than-expected wage growth has been one reason for the MPC’s decision to leave interest rates on hold at their record low of 0.5% throughout 2015. Mark Carney, the Bank of England’s governor, predicted in July that the decision about raising rates could come into “sharper focus”, “around the turn of the year”; but the final MPC meeting of the year passed with just one of its nine members voting for an immediate increase.

The latest official data showed wage growth slowing to an annual rate of 2%, in the three months to October. Wage growth has repeatedly been weaker than forecasters have expected over recent years, despite the rapid rate of jobs growth, which would usually be expected to lead to upward pressures on pay.

Andy Haldane, the Bank’s chief economist, has suggested structural factors, including technological advances that have left a growing number of workers vulnerable to being replaced by machines, could continue to undermine wage growth.