Unemployment is rising – can employers stop worrying about offering an attractive wage?
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Labour market economists discuss whether pay can be decreased and if the current skills problem in the UK could compound the issue further
by Elizabeth Howlett 22 August 2023
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Official data has pointed to unemployment being on the rise, while the Prime Minister and The Bank of England have been pleading with employers to lower their proposed wage rises. With more people chasing fewer job vacancies, will firms be able to take their foot off the pedal when it comes to wages?
The latest Office for National Statistics (ONS) labour market report found unemployment rates for April to June 2023 increased on the quarter to 4.2 per cent, while annual growth in regular pay rose to 7.8 per cent.
This has led – according to Daily Mail reporting – to Prime Minister Rishi Sunak urging employers to consider “sustainable” pay rises that focus on “rewarding productivity”, in a bid to curb inflation.
Commenting on the ONS figures, Jon Boys, senior labour market economist at the CIPD, says that demand for workers, as evidenced by job vacancies which fell by 66,000 in the quarter to 1,020,000, has decreased.
“The supply of potential workers is increasing as unemployment edges slightly higher. Many people are leaving economically inactive categories to look for work, but evidence suggests this group are finding it harder to get into jobs,” says Boys.
So if candidate levels are rising, can employers stop competing for talent with wages?
Economics 101
It all comes down to “standard economic theory”, says Professor Keith Bender, SIRE chair in economics at the University of Aberdeen.
“As unemployment increases, the unemployed will moderate their wage demands, since all they may be receiving in income is any benefits that the government gives,” he explains.
“In an economy with few labour market frictions, workers will moderate their wage demands too as employers will look for cheaper labour among the unemployed.”
However, he adds a curveball, that while this is the standard theory there are a lot of “background assumptions” that simplify the “complexity of the real world” – and the biggest assumption is that the unemployed have the skills to be employed in the job mix that firms are providing.
Skills mismatch
And, as Boys previously points out, many people are “leaving economically inactive categories” to look for work and the pool of unemployed workers in the UK may not currently have the desired skills.
This was evidenced in previous People Management reporting of ManpowerGroup data, which found four fifths (80 per cent) of UK businesses had “persistent difficulty” filling jobs.
The ManpowerGroup Talent Shortage survey of 2,000 UK employers found that shortages marked a 17-year high, with the number of organisations reporting skills gaps having grown six-fold over the last decade (from 13 per cent in 2013).
But according to labour market economist Ian Brinkley, it would take a recession to cause a “rapid decline in pay pressures” and the ONS stats are only indicating a “more modest rise” in unemployment.
“[It will] still take some pressure off” if employers reduce their pay offering, says Brinkley, but it will have “limited” impacts.
“This is partly because the likely rise in unemployment will be very uneven – it typically affects those with fewer skills and less experience in local areas with weak economies the most. The young without qualifications are especially vulnerable,” he explains.
“Some employers may not therefore notice much difference. This is especially so for those facing long term difficulties recruiting in areas where skill and labour market shortages have been significant and long lasting and those recruiting for more skilled and professional positions.”
This is echoed by Kate Shoesmith, deputy chief executive at REC, who says we are “nowhere near” the point where companies can stop offering attractive pay offers – and she says skills are the pinch point.
“Employers may need to reconsider the skills that they deem to be essential rather than just desirable,” says Shoesmith.
The idea of skills-based hiring was debated in a recent People Management article, in response to APSCo OutSource’s – the trade association for recruitment outsourcing – suggestion that firms shift to skills-first hiring to plug talent gaps.
Will pay be impacted?
James Rimmer, principal consultant at Expense Reduction Analysts, says that we are not at a point when businesses can “take their eye” off pay.
But he adds that pay is not the only way to retain and attract candidates: “For example, with the NHS waiting times at an all-time high, staff might value health insurance or other specific perks and whilst they don’t replace the need to be competitive it can solve issues raised in staff surveys.”
He also suggests that as the UK’s productivity continues to lag behind other “advanced economies” employers should not be afraid to invest in staff training.
However, John Philpott, director at The Jobs Economist, says there is no yes or no answer for employers as high unemployment rates – which “isn’t generally good news” for employers – can act as a double-edged sword as pay presents “dilemmas” of its own.
“For example, while a bigger jobless pool may make it easier for employers to find staff without having to use pay incentives it can also complicate the recruitment process,” he explains, as employers will have to sift through more applications.
Ultimately, Bender says pay will depend on whether the unemployed are a “good match” for jobs on offer.
“If there is not a good match, then the unemployment won’t matter at all for the employment side – and could be harmful overall if unemployment reduces income and so people do not buy as many goods and services and put pressure on revenue streams of firms,” he says.
“It is quite a knife-edge really – firms generally like some unemployment but not so much that it reduces purchasing.”
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Labour market economists discuss whether pay can be decreased and if the current skills problem in the UK could compound the issue further. by Elizabeth Howlett 22 August 2023. Share article on Twitter. Share article on Facebook. Share article on LinkedIn. Official data has pointed to unemployment being on the rise, while the Prime Minister and The Bank of England have been pleading with employers to lower their proposed wage rises. With more people chasing fewer job vacancies, will firms be able to take their foot off the pedal when it comes to wages? The latest Office for National Statistics (ONS) labour market report found unemployment rates for April to June 2023 increased on the quarter to 4.2 per cent, while annual growth in regular pay rose to 7.8 per cent. This has led – according to Daily Mail reporting – to Prime Minister Rishi Sunak urging employers to consider “sustainable” pay rises that focus on “rewarding productivity”, in a bid to curb inflation. Commenting on the ONS figures, Jon Boys, senior labour market economist at the CIPD, says that demand for workers, as evidenced by job vacancies which fell by 66,000 in the quarter to 1,020,000, has decreased. “The supply of potential workers is increasing as unemployment edges slightly higher. Many people are leaving economically inactive categories to look for work, but evidence suggests this group are finding it harder to get into jobs,” says Boys. So if candidate levels are rising, can employers stop competing for talent with wages? Economics 101. It all comes down to “standard economic theory”, says Professor Keith Bender, SIRE chair in economics at the University of Aberdeen. “As unemployment increases, the unemployed will moderate their wage demands, since all they may be receiving in income is any benefits that the government gives,” he explains. “In an economy with few labour market frictions, workers will moderate their wage demands too as employers will look for cheaper labour among the unemployed.” However, he adds a curveball, that while this is the standard theory there are a lot of “background assumptions” that simplify the “complexity of the real world” – and the biggest assumption is that the unemployed have the skills to be employed in the job mix that firms are providing. Skills mismatch. And, as Boys previously points out, many people are “leaving economically inactive categories” to look for work and the pool of unemployed workers in the UK may not currently have the desired skills. This was evidenced in previous People Management reporting of ManpowerGroup data, which found four fifths (80 per cent) of UK businesses had “persistent difficulty” filling jobs. The ManpowerGroup Talent Shortage survey of 2,000 UK employers found that shortages marked a 17-year high, with the number of organisations reporting skills gaps having grown six-fold over the last decade (from 13 per cent in 2013). But according to labour market economist Ian Brinkley, it would take a recession to cause a “rapid decline in pay pressures” and the ONS stats are only indicating a “more modest rise” in unemployment. “[It will] still take some pressure off” if employers reduce their pay offering, says Brinkley, but it will have “limited” impacts. “This is partly because the likely rise in unemployment will be very uneven – it typically affects those with fewer skills and less experience in local areas with weak economies the most. The young without qualifications are especially vulnerable,” he explains. “Some employers may not therefore notice much difference. This is especially so for those facing long term difficulties recruiting in areas where skill and labour market shortages have been significant and long lasting and those recruiting for more skilled and professional positions.” This is echoed by Kate Shoesmith, deputy chief executive at REC, who says we are “nowhere near” the point where companies can stop offering attractive pay offers – and she says skills are the pinch point. “Employers may need to reconsider the skills that they deem to be essential rather than just desirable,” says Shoesmith. The idea of skills-based hiring was debated in a recent People Management article, in response to APSCo OutSource’s – the trade association for recruitment outsourcing – suggestion that firms shift to skills-first hiring to plug talent gaps. Will pay be impacted? James Rimmer, principal consultant at Expense Reduction Analysts, says that we are not at a point when businesses can “take their eye” off pay. But he adds that pay is not the only way to retain and attract candidates: “For example, with the NHS waiting times at an all-time high, staff might value health insurance or other specific perks and whilst they don’t replace the need to be competitive it can solve issues raised in staff surveys.” He also suggests that as the UK’s productivity continues to lag behind other “advanced economies” employers should not be afraid to invest in staff training. However, John Philpott, director at The Jobs Economist, says there is no yes or no answer for employers as high unemployment rates – which “isn’t generally good news” for employers – can act as a double-edged sword as pay presents “dilemmas” of its own. “For example, while a bigger jobless pool may make it easier for employers to find staff without having to use pay incentives it can also complicate the recruitment process,” he explains, as employers will have to sift through more applications. Ultimately, Bender says pay will depend on whether the unemployed are a “good match” for jobs on offer. “If there is not a good match, then the unemployment won’t matter at all for the employment side – and could be harmful overall if unemployment reduces income and so people do not buy as many goods and services and put pressure on revenue streams of firms,” he says. “It is quite a knife-edge really – firms generally like some unemployment but not so much that it reduces purchasing.” Related Articles. UK employment growth to slow dramatically in next decade, report suggests. 25 July 2023 by Lucie Mitchell. Commentators urge government to take action now to avoid continued skills and labour shortages. Companies are raising pay but should be encouraging more people back into work, say experts. 11 July 2023 by Elizabeth Howlett. While wage growth and declining economic inactivity is ‘unambiguously good news’, commentators warn it is not sustainable. Quiet quitting vs loud layoffs – both staff and firms are getting their point across. 23 May 2023 by Ghaz Samandari. As mass redundancies at global companies continue to make headlines, workers are quietly letting their position be known, says Ghaz Samandari. More on this Topic. Recruiters fear 'wage secrecy' is to blame as average advertised HR salaries fall by 6 per cent. Bus driver who lost his licence after having stroke and was later fired on medical grounds was unfairly dismissed, tribunal rules. Average UK employee clocks 18 days of unpaid overtime a year, research shows. Disabled administrator advised to 'chart a different path' after requesting time off to attend hospital was victim of discrimination, tribunal rules. Companies increasingly dropping degree requirement from job adverts, data reveals.