The Great Wage Rise Conundrum – Where Will the Money Come From?

It’s one of the great mysteries of Britain’s jobs boom. Despite creating jobs at a prodigious rate, salaries are stagnating in much of the UK. In fact, real wages are lower now than a decade ago and average pay growth is at its weakest since the Napoleonic wars.

There are indications, however, that employers are trying to end the impasse. Recent research conducted by Indeed and the British Chambers of Commerce (BCC) found that half of the UK’s businesses are set to give staff a pay rise of at least 2% over the next year, with almost a third (32%) targeting somewhere between 2.5% and 5%.

This may not sound like very much, but for employees who’ve seen years of wage stagnation, any pay rise is better than no pay rise. A decade on from the financial crisis, the average UK worker still earns less in real terms than they did at the pre-downturn peak in February 2008.

But despite their best intentions, business leaders who want to pay their staff more face one awkward – and inescapable – question: where will this extra money come from?

The tight labour market makes rewarding staff an increasing priority for employers, but they will now have to be smart in how they deliver on these aspirations. Short of discovering a money tree in the back garden, employers who want to hike wages must find the funds from elsewhere.

The wage dilemma

That companies feel they need to start offering pay rises again is a reflection of the acute talent shortage they come up against whenever they want to hire.

UK unemployment is at a 43-year low, creating a shallow pool of candidates for employers to recruit from. As a result, skilled and experienced staff are in high demand, making it difficult both to retain good employees and to new talent.

We’ve written previously about some of the non-salary related ways that companies are seeking to retain and attract staff; offering training and development, for example, or allowing staff to work more flexible hours, all in appreciation of the need for a healthy work-life balance for employees.

While perks and non-financial benefits can be hugely important in many workers’ attitudes to their job, money always talks – and at least as loudly as anything else.

The financial crash of 2008 and subsequent years of public sector austerity and economic stagnation made wage freezes inevitable. But with the return of growth – and the job creation boom – workers could well feel that they now hold many of the cards.

Cost cuts and price hikes

The research highlights the quandary many employers find themselves in. Yes, 50% of them have every intention of giving their staff at least a 2% salary rise over the coming 12 months. But where does that money come from? And is it more telling that 50% will not be doing so – presumably because they can’t, rather than because they won’t?

The same Indeed-BCC research offers some of the answers. 37% acknowledge they will need to raise the prices of their products and services while 23% are willing to accept lower margins and profits – all in the name of making sure staff wages continue to climb in step with the National Living Wage.

More innovative approaches are also taking hold. 16% of companies aim to up their investment in automation, while the same proportion again are open to engaging a more flexible workforce, such as part-time workers or the self-employed.

The impact of this approach can be double-edged for employers, of course. Many workers prefer the stability of a permanent job over than the uncertainty of freelance work, so attracting willing staff on highly flexible contracts may not always be straightforward.

Equally, the spectre of a ‘rise of the machines’ will concern workers who may then be vulnerable to technological change. Even in a period of low unemployment, higher-skilled workers tend to be the most highly sought after, along with empathy-based roles and certain specialised manual jobs. And while robots are by no means going to stage a Hollywood-style takeover, the long-term cost-effectiveness of automating repetitive, low-skilled processes will make doing so increasingly attractive to many employers.

Raising revenue is always high on many companies’ agendas, whether through cutting costs or through raising prices, and it is employees who look set to benefit in the immediate term – but how much will this actually cost businesses?

Tara Sinclair, senior fellow and economist at Indeed, summed up the quandary perfectly. “The figures suggest brighter times are ahead for workers, who after seeing their wage growth barely exceed inflation, could receive a meaningful pay rise,” she said. “The question now is will they raise wages enough to continue to outpace price rises?”

And with the Consumer Price Index showing that prices rose by 2.7% in the 12 months to August 2018, employers already have their work cut out to keep up.

The Brexit question mark

Of course, one large cloud on the horizon is the continued lack of clarity surrounding the UK’s imminent departure from the European Union.

While Brexit uncertainty has had noticeable and significant effects on the economy over the past couple of years, the impact of Brexit itself is what will truly affect the jobs market.

Against such a turbulent backdrop, forecasting where the economy will go in coming months has rarely been more difficult, let alone trying to put business plans together for the next three to five years.

As such, while cautious optimism and gentle growth may be fuelling good intentions among employers right now, this could change fast if fallout from Brexit proper were to stymie future wage growth.

Equally, if the government can negotiate a favourable Brexit deal, optimism could flood back into the economy and potentially fuel growth across the board – perhaps more than just 50% of companies would give staff a generous pay rise in the near future.

The good news for workers is that the intent is clearly there; the hope now has to be that the economic climate continues to allow bosses to make good on their aims of generosity.

Stagnant wages make working and living more difficult for staff, and make the jobs market more competitive for employers. That wages need to start growing again is a sentiment many companies share and, whether by cutting operating costs or raising prices to boost revenue, many employers are already looking to lift salaries. Getting level of wage rises right is a delicate – but essential – balancing act.