Salary Review 2014

Pay Settlements – 12 month Review

The economy is growing again, but there is little sign of it in headline trends on pay deals in the private sector. Meanwhile, Chancellor Osborne continues to hit public sector workers hard. Analysis of the 2013 pay round shows in the private sector the average rise was lower than in 2012, while the overall rise within the whole economy was unchanged.

Median pay settlements in the UK for the year 2013 remain at 2.5% (upper quartile: 3%; lower quartile: 2.0%),

The median pay award in manufacturing remains steady at 2.7%, the only broad sector, along with energy, to exceed the overall private sector median rise of 2.5%

The percentage of employers operating a pay freeze has fallen from 16.2% in 2012 to 9.6% over the last 12 months, with about half in the private sector, which demonstrates how far the labour market has yet to go to recover from the recession.

The upward pressures on pay are still fairly muted, following falling inflation, continued fragility in the labour market – with an increase in part‐time at the expense of full‐time work – and a comparatively low uplift in the National Minimum Wage in October 2013.

Pay Settlements – 3 month Review & Forecast

Settlements for the 3 months to November 2013 had fallen to a low of 2%, little change from the previous quarter.

As we move into a busy period for pay setting in the manufacturing sector it is likely that we will see a rise in the median award. Early indications for the three months to January 2014 show a median pay increase of 2.5 per cent. In the three months to December 2013 the median remained steady at 2 per cent, the level it had stayed at throughout the latter half of last year.

Average Pay Settlements by Sector 2013

Sector Percentage Pay Settlement [2012 Settlements]
Agriculture, Forestry & Fishing 2.0% [2.4%]
Construction 2% [0%]
Education 0.7% [1.0%]
Energy, Water, Mineral, Metals 3.0% [3.5%]
Finance & Business Services 2.0% [2.5%]
Health 1.0% [0%]
Manufacturing [Chemical, Mineral & Metals] 2.5% [3.0%]
Manufacturing [Engineering & Metal Products] 3.0% [3.0%]
Manufacturing [Other] 2.5% [2.5%]
Public Administration 1.0% [0%]
Retail, Leisure, Wholesale, Hotel & Catering 2.1% [2.5%]
Transport & Communication 2.7% [3.0%]
Other Services 2.0% [2.0%]

Distribution of Pay Settlements, 12 months to November 2013

Percentage Increase Number of Settlements By Percentage [Previous 12 months]
Pay Freeze 10% of Settlements [16%]
0.1 – 1.99% 16% [13%]
2.0 – 2.99% 44% [47%]
3.0 – 3.99% 27% [19%]
4.0%+ 3% [5%]


Pay Settlements – 2014 Forecast

The private‐sector is predicting another year of subdued pay rises, with increases forecast to be worth around 2.5%. There are some positive signs, with fewer employers predicting a pay freeze, but awards expected to be worth more than 3% remain rare.

The latest study on pay forecasts for the forthcoming year has revealed that employers in manufacturing, production and services expect to give a median pay award of 2.5%. Almost a quarter of employers surveyed disclosed that they forecast a 2% wage rise, while a similar proportion anticipated one of 3%.

Pay freezes that were popular during the recession continue to decline in numbers, with only 6% of proposed settlements awarding employees no pay increase.

The research showed that employers will continue to take into account a number of different factors when considering the level of their next pay award. The top 5 factors are [1] Company performance [2] ability to pay [3] the level of inflation [4] pay levels at other organisations and [5] recruitment and retention factors. [These findings were based on a survey of pay‐setting intentions of 240 private‐sector organisations]

Overview of UK Inflation

The UK inflation rate as measured by the Consumer Prices Index (CPI) fell to 2% in December from 2.1% the month before (ONS). This is the first time that the CPI has been at or below the Bank of England target since November of 2009, when the index stood at 1.9 percent.

The largest contributions to the fall in the rate came from prices for food and non‐alcoholic beverages, especially fruit and meat, and recreational goods and services like computer games. These were partially offset by an upward contribution from motor fuels.

The largest upward contribution came from transport prices, mainly cost of petrol and diesel. Petrol prices rose by 0.5 pence per litre between November and December. Diesel prices rose by 0.8 pence per litre. The upward contribution was partially offset by lower prices of air fares.

The overall price increase for gas and electricity in December of 2013 was slightly larger than the rises a year earlier, resulting in a small upward contribution to inflation.

Economic forecasts for inflation in 2014 is that it will average 2.3% compared with 2.7% in 2013 [PWC Economic Projections 2014 Report].

Overview of UK Unemployment

2,320,000 in three months to November 2013

Under the government’s preferred measure ‐ the International Labour Organisation (ILO) count ‐ UK unemployment fell by 167,000 to 2,320,000 in the three months to November compared with the previous three‐month period (August ‐ October). A fall of 167,000 in the unemployment level over three months hasn’t been seen since 1997. The unemployment rate fell from 7.4% to 7.1%.

The number of people out of work and claiming benefit fell by 24,000 in November to 1,250,000. The number of 16‐24 year olds out of work fell by 39,000 from the previous three‐month period to 920,000. The number of people in employment increased by 280,000 to reach 30.15 million.

Real average earnings are expected to decline for the sixth consecutive year in 2014, although the gap between prices and earnings is expected to be the smallest since 2009, so the real wage squeeze will start to ease.

Continued real wage constraint will, however, support employment growth, pushing unemployment down to close to the Monetary Policy Committee’s [MPC] 7% threshold sooner in 2014. This is likely to restart the debate on monetary tightening, with a minority of MPC members expected to be voting for interest rate sooner than planned. However, the Bank of England have said that they won’t necessarily act immediately and the first actual rate rise could be expected early 2015.

Economic Overview

There are now real grounds for optimism that the UK is finally on the road to recovery. The services sector continues to lead the recovery with retail sales picking up over the summer and hotels and restaurants generally seeming busier. But it is not just services that is picking up. UK manufacturers have benefited from somewhat stronger trends recently in our key European export markets. And the UK construction sector has also picked up from a low base in the past six months. Employment is rising, output is on the up and houses are selling. Overseas, the US is edging towards a budget deal and the euro zone dog barely barked in 2013.

Projected GDP growth for the UK as a whole is around 1.4% in 2013, gathering pace to around 2.4% in 2014. All regions should see stronger growth during 2014, led by London. Growth of 0.8% in the third quarter of 2013 has reinforced the positive momentum established by 0.7% growth in the second quarter.

Future growth expectations have also picked up as business and consumer confidence has risen in recent months. Growth continues to be led by the services sector, but latest data also show signs of recovery in manufacturing and construction that we would expect to strengthen further through 2014.

But, and it’s a big but! Businesses should not be complacent: there are still plenty of economic risks out there. UK growth relies too much on consumers spending more even as real wages fall. Unemployment is still high. The Eurozone crisis is merely in remission and there is the probability of significant flare‐ups occurring in 2014. We don’t know how the rest of the world will react to tightening US monetary policy. And the long‐run squeeze on many households’ incomes won’t relent.

Cautious optimism for 2014!