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Job vacancies have hit an all-time high as the economy recovers. The number of vacancies posted between June to August rose above one million for the first time since records began in 2001. We examine whether employees are more willing to move as we emerge from the pandemic and the impact this will have on employers.

The Office for National Statistics captured an increase in the number of payroll employees by 241,000 to 29.1 million in August. Employment in all regions of the UK is back to pre-Covid levels, except in London, Scotland and the south-east of England. As we examine the impact on businesses, we discuss how employers can set pay levels amid the uncertain impact of factors like Brexit and skills shortages as the UK labour market becomes buoyant. Here are five factors to bear in mind when approaching your pay strategy for the year ahead.

1. Beware of short-term figures

“Construction and consulting sectors report increases in pay, but overall the recovery of pay levels is perhaps not as big as the headline figures suggest.”

When considering the movement on pay over the past year, the annual figure suggests that levels are increasing at a fast rate. Year on year, there is the perception of a six to seven per cent increase, according to our latest data. However, it is important to take a longer-term view of the figures. Levels dipped last year so the last twelve months can be seen as a catch-up period. Viewed across two years, the picture on pay is more consistent, with the rate of growth compensating for the effect of the pandemic. Construction and consulting sectors report increases in pay, but overall the recovery of pay levels is perhaps not as big as the headline figures suggest. 

Looking at the figures in August, there looks to be a steep rise in pay levels in the private sector, but in reality, this is on a par with incremental increases to the pre-pandemic levels of pay. The average earnings went up in the public sector due to an upward lift in government spend in March 2020 as the pandemic unfolded and before lockdown was implemented. Whilst healthcare, residential care and housing associations which are all intertwined with the public sector show a dip this year, this may reflect the generous pay levels ahead of the pandemic’s effects being felt by employers. This delayed effect is the opposite experienced by the private sector which is now seeing an uplift in pay to rectify a year of pay freezes for 24 per cent of respondents to our UK Reward Management Survey in autumn 2020. To ensure pay packages are competitive, we recommend getting up to date data on pay. Pay benchmarking can help you stress test your pay levels for the year using the latest market intelligence.

2. Look ahead to 2022 pay trends

When looking at pay predictions for 2022, our research highlights higher levels of confidence from businesses, with the easing of restrictions giving businesses more clarity over the next 12 months. With certain businesses having more confidence about operating in spite of a lockdown, this gives some sectors more assurance that they are prepared for this winter. Professional services sectors can make contingency plans for the worst-case scenario, aside from retail and hospitality. Pay levels are recovering to pre-pandemic levels, but this comes with a caveat. Employers who granted more generous pay levels in 2020 are generally more constrained in their official pay figures for this year and vice-versa, so it is important to access the most up to date pay figures in a volatile labour market.

2022 pay review predictions are currently a carbon copy of those seen in 2019 before the outbreak of Coronavirus, with a significant proportion of 2.5 and three per cent predicted increases."

The uncertainty around the impact on pay levels in 2022 persists. The private sector has made greater use of furlough, reduced hours and pay cuts to weather the pandemic, so are recovering from the huge dip in pay levels; as a result accurate projections of pay are still early. Employers should approach setting pay levels with caution and try to ground this in benchmarked figures. Two per cent is the most common projection, reflecting the two per cent average of 2021 after a fairly consistent three per cent level before the pandemic. 2022 pay review predictions are currently a carbon copy of those seen in 2019 before the outbreak of Coronavirus, with a significant proportion of 2.5 and three per cent predicted increases. Combined with inflation set to reach a decade high of three per cent, employers may have to match this to ensure they are paying objectively fairly.

3. Target shortages of key skills

In addition to employers granting meaningful wage increases, pay levels are also critical to ensure that employers are reaching the right talent. Construction, IT and digital continue to be areas where skills shortages are most commonly reported. Construction is ahead of the game in the return to the office because of practicalities having carried on as essential work. In service organisations, most are still working from home and labour turnover is only starting to emerge as employers define their approach to going back to the office.

For those who are working from home, job security during turbulent times has driven down employee turnover, with people feeling they are better staying. A more competitive labour market is indicated by the average pay increase being back to 2.5 per cent. There is also the question of out of cycle pay reviews and how employers are using these. We noted before the pandemic that official pay figures were often only telling one half of the story when it comes to pay. Many employers reported ring fencing up to one per cent of their pay budgets to target critical roles and supplement constrained pay. An increasing number of employers predicted using out of cycle pay increases in 2021 and 78 per cent of respondents cited market pressures as a key driver for their use. Targeting highly sought-after skills with pay is a key priority, with the CBI warning that labour shortages could last for up to two years. Skills training and apprenticeships are being identified as two key ways that this shortage can be addressed, as the market for existing talent remains competitive

4. Consider the ongoing impact of Brexit

Market commentators are saying that employers are having to fight harder than ever for the right talent."

Brexit has had a direct influence on constrained pay levels since the UK voted to leave the EU. The extraction created economic uncertainty for businesses facing increased regulation and supply issues, alongside the pandemic unfolding. The end of the free movement of people meant that many have moved back to Europe, now earning more at home than here. Others moved back to their families amid the Covid pandemic and have not returned. Market commentators are saying that employers are having to fight harder than ever for the right talent and how furloughed employees have been treated in this period will also determine whether they want to stay in their company.

The construction sector is reporting labour shortages for trades roles, particularly plumbers and electricians. Supermarket retailers are offering sign-up bonuses to attract HGV drivers. Prices have also increased in supermarkets and for purchases such as kitchens and furniture. Staff shortages will shape the UK’s ability to recover post-pandemic and keep inflation under control. With reports over the weekend that gas prices are also set to soar and affect Christmas supply chains, businesses are set to face ongoing uncertainty that they require greater workforce planning and employee contingency plans.

5. Make your workplace culture a retention tool

The ongoing debate around what workplaces will look like post-pandemic will also come into play when it comes to setting competitive levels of pay. Virtual workplaces and the introduction of hybrid working must be carefully planned to avoid creating divisions within the workplace. Employers are also voicing concerns around the potential short-term memories of employees in remembering how well they’ve been treated during the pandemic and whether this will protect employers from retention challenges.

Putting employees at the heart of strategies to return to the workplace after lockdown, by actively listening to them so they feel seen and heard, will ensure that they have a sense of belonging. Not only can this drive down employee turnover, it will be a key part of an organisation’s employee value proposition to attract new candidates. A new McKinsey study has found that 40 per cent of employees surveyed are likely to leave their current job in the next three to six months – many without having a new job in hand. Employers must ensure they are identifying the drivers for people exiting the business and what they value to reduce attrition.

Get in touch

With the labour market overflowing with opportunities for candidates and three quarters of workers looking for a new job, from an employee perspective, individuals are feeling more confident in making a move in their role. With skills shortages also remaining, employers have crucial recruitment and retention challenges on the horizon. Competitive pay is one element of the reward strategy that employers must get right, but creating a culture that candidates want to join and employees really value is crucial to keeping your greatest assets – your people.

Call us today to discuss your approach to employee retention and how to drive employee engagement during uncertain economic conditions.

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