New data reveals that private sector employers are set to award workers with an average pay rise of 2.5% next year. This modest amount comes at a time when unemployment is falling. So why are such measly rises planned? Here’s what you need to know.
What will the average pay rise be next year?
According to the Chartered Institute of Personnel and Development (CIPD), the average private sector worker in the UK is set to pocket a 2.5% pay rise in 2022.
To arrive at this figure, the CIPD asked 1,000 employers the likely pay award they would offer workers in September 2022, compared with September 2021. When the CIPD asked the same question three months ago, employers suggested just 2.2%. This tells us that employers are recognising the need to pay their workers more in order to stay competitive.
For public sector workers, the CIPD suggested these workers are in line for a much smaller 1% rise next year. However, this survey was conducted before Chancellor Rishi Sunak revealed he would unfreeze public sector pay last month, placing doubt on this 1% figure.
Does 2.5% represent a decent pay rise?
In normal times, many employees would consider 2.5% a decent – if not overly generous – pay rise. However, it’s fair to say that in the current climate, many employees will feel that 2.5% is unfair.
This is mainly down to two reasons. Firstly, the current rate of inflation stands at 4.2%. This means those on fixed incomes will be poorer next year unless they score a pay increase in line with the inflation rate.
As a result, a typical 2.5% raise means that workers will effectively be worse off next year. That’s even before taking into account an extra years’ experience on the job.
On a similar note, it’s an open secret that there is a labour shortage across the UK right now. According to the CIPD, the proportion of employers who reported hard-to-fill vacancies now stands at 47%. When the survey was completed three months earlier, this figure stood at just 38%. In addition, ‘hiring intentions’ among employers are now at their highest since the CIPD began its survey in 2012.
Why are planned rises so low despite a shortage of workers?
Traditionally, a shortage of workers puts the ball in the court of employees. That’s because a low availability of workers gives employees greater leverage to negotiate wages. However, with 2.5% increases planned, big pay rises across the board are unlikely to occur in 2022.
One reason for this may be the current shortage of workers being concentrated in a small number of specific sectors, such as lorry driving, food processing and hospitality.
Another reason may be that employers have been used to paying low wages when the UK was able to attract a larger pool of workers from the EU. It’s therefore entirely possible that now the UK has left the EU, some employers are unwilling to increase wages for British workers.
Gerwyn Davies, senior labour market adviser at the CIPD, explains: “There’s a relatively long tail of employers who could be doing more to attract and make full use of available workers.”
Davies also says that the state could play a part in addressing the current skills shortage: “More business support is required from government to help employers increase their capability to invest in skills and create better quality and more productive jobs.”
How will low pay rises impact the UK economy?
Had large pay rises been forecast across the board, many would have feared inflation accelerating at a faster pace during 2022. That’s because when wages rise, people have more money in their pockets, which can place upward pressure on the prices of goods and services.
As a result, many economists will be relieved that wage rises will be ‘in check’ next year. The Bank of England will also welcome these modest increases. That’s because slow wage inflation lessens the pressure on the central bank to increase its base rate.