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Manufacturing pay rises scrape ahead of inflation

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By James Ridler+

17-Feb-2017
Last updated on 17-Feb-2017 at 12:28 GMT2017-02-17T12:28:09Z

Inflation are forecast to overtake pay rises in the manufacturing sector
Inflation are forecast to overtake pay rises in the manufacturing sector

Pay increases in the manufacturing sector – including food and drink firms – are slightly ahead of consumer price inflation, revealed EEF, the manufacturer’s organisation.

The three-month average pay settlement for manufacturers in January was 1.9%, compared with the average of 1.8% last year, while average pay deal in January was slightly higher at 2%.

However, consumer price inflation grew to 1.8%, which the EEF claimed would mean many workers could still end up out of pocket.

The number of pay deals that have resulted in a freeze have dropped to 9%, after rising to 26% of cases in August last year.

While pay settlements saw a steady increase in January, EEF’s chief economist Lee Hopley said business uncertainty was prohibiting pay increases.

‘Manufacturers remain cautious’

“Manufacturers remain cautious when it comes to pay rises,” said Hopley. “In addition, the recovery in oil and commodities prices and the dive in sterling have caused a surge in input costs, squeezing manufacturers’ profit margins and acting as a drag on the affordability of higher pay levels.

“But with CPI [consumer price index] set to breach the Bank of England’s 2% target in the coming months, there could be some pressure coming on future pay deals [suppressing future rises].”

The EEF’s report came as the Office of National Statistics (ONS) released the latest employment figures in the UK labour market. 

Figures showed UK unemployment fell by about 7,000 to 1.6M people, “the lowest in over a decade”, said the ONS. The ONS’s report on the UK labour market is available here.

Weakened pay growth

Hopley said the growth in employment in the past three months had weakened pay growth. Employers would not increase wages, because they can promote existing staff rather than hiring from outside.

“If companies need more workers and they aren’t scarce, because people are staying in employment for longer or are happy to move from part time to full time. The employees don’t have a lot of bargaining power,” said Hopley.

“Also linked to pay is productivity growth – ultimately this is the biggest factor in pay levels across the economy. If productivity isn’t growing very fast, which it isn’t, then companies aren’t in a position to offer big wage hikes.”

Economic uncertainty and affordability also play a part in what firms will offer in terms of pay settlements and what employees are likely to accept, Hopley added.

 

Confederation of British Industry response to ONS labour market statistics

Rachel Smith, principal labour market economist, said: “Pay growth remains stubbornly sluggish, which is a concern given rising inflation. There are tentative signs that productivity is picking up, but there is further to go before it can underpin faster wage growth.

“Companies will be looking to the Budget to see adjustments to business rates along with measures to boost educational performance, helping firms to drive faster productivity growth.”

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