The pay squeeze: implications for ERKen Mulkearn, Head of Pay & Research, IDS

Manchester Industrial Relations Society5 December 2013

Pay awards in 2013 from IDSPay.co.uk

2

Pay freeze 0.1-1.99% 2.0-2.99% 3.0-3.99% 4.0%+0%

10%

20%

30%

40%

50%

60%

8%11%

51%

27%

3%

Distribution of pay settlements, 2013

% o

f pay

sett

lem

ents

Sector-by-sector outcomes 2013

• Manufacturing median pay award – 2.5%; private services – 2.5%; not-for-profit organisations – 2%; public sector – 1%

3

Below 2.5% At 2.5% Above 2.5%

Construction (1.75%)

Engineering Aerospace & defence (3%)

Retail (2%) Financial services

Chemicals (2.8%)

Pharmaceuticals (2.4%)

Food, drink & tobacco

Energy & water (3%)

Motor industry (3%)

Average Weekly Earnings (AWE)

• 0.7% earnings growth across economy (September 2013)

• Total earnings in private sector up 1.1%, public sector flat

• Why is earnings growth below pay settlements?

• Don’t measure the same thing – AWE affected by different changes in pay and labour market to IDS pay settlements

• Overtime, working hours, bonuses, market adjustments and shifts in structure of workforce all affect AWE

4

Real wages negative since pre-recession

5

Aug/0

6

Nov/0

6

Feb/

07

May/0

7

Aug/0

7

Nov/0

7

Feb/

08

May/0

8

Aug/0

8

Nov/0

8

Feb/

09

May/0

9

Aug/0

9

Nov/0

9

Feb/

10

May/1

0

Aug/1

0

Nov/1

0

Feb/

11

May/1

1

Aug/1

1

Nov/1

1

Feb/

12

May/1

2

Aug/1

2

Nov/1

2

Feb/

13

May/1

3

Aug/1

3

-4

-3

-2

-1

0

1

2

3

4

Pay rises adjusted by RPI, 2005-2013

Real-terms pay rises

Source: IDS

The labour market

6

6

6.5

7

7.5

8

8.5

Q3 2013 Q4 2013 Q1 2014 Q2 2014 Q3 2014 Q4 2014

CE

DB

GS

LB

NO

RBS

Rounded Average

%

Forecasters CE: Capital Economics; DB: Deutsche Bank; GS: Goldman Sachs; LB: LLoyds Banck Commercial Banking; NO: Nomura; RBS: Royal Bank of Scotland

City forecasts of unemployment rate

Changes in public sector employment 1992-2012

7

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

-400

-300

-200

-100

0

100

200

Annual headcout

change (

thousands)

Inflation outlook

8

Business investment

9

2007

Q4

2008

Q2

2008

Q4

2009

Q2

2009

Q4

2010

Q2

2010

Q4

2011

Q2

2011

Q4

2012

Q2

2012

Q4

2013

Q2

0

5000

10000

15000

20000

25000

30000

35000

40000

45000

Business investment Chained volume measure, seasonally adjusted NPEL

What might happen on the reward front in 2014?

10

Influences on reward in 2014

Upward pressure? Downward pressure?

Economic recovery and potential impact on business investment

Fragility of recovery and susceptibility to external shocks

Recruitment and retention issues

Slow pace of recovery in labour market

The role of reward in employee engagement

Inflation forecast to stay flat into 2014

Employers’ intentions for 2014

27%

9%

64%

Pay expectations for 2014 relative to 2013 awards

The same

Higher

Lower

Source: IDS

11

People issues

12

Recru

iting

/reta

inin

g ke

y st

aff

Empl

oyee

eng

agem

ent a

nd m

otiv

atio

n

Keepi

ng la

bour

cos

ts in

che

ck

Makin

g su

re p

ay is

alig

ned

with m

arke

t

Dealin

g with

skill

s sho

rtage

s and

/or a

nom

alie

s

Linki

ng p

ay to

pro

duct

ivity

Aligni

ng p

ay ri

ses w

ith in

flatio

n0%

10%20%30%40%50%60%70%80%90%

100% 96% 92% 88%76%

63%54%

36%

'Very important' or 'important' issues for reward strategies in 2014

% o

f re

spondents

The rise of the ‘Living Wage’

13

1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 20120

1

2

3

4

5

6

7

0

2

4

6

8

10

12

Rate and increases in the National Minimum Wage 1999-2012

Adult NMW £ph % increase

Adul

t NM

W £

ph

% N

MW

incr

ease

Thank you very much – questions welcome

020 7422 4937

ken.mulkearn@thomsonreuters.com

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