Economic commentary - January 2010: upward pressure on pay

We can begin the year with a certain cautious optimism, writes Mark Crail, head of benchmarking and data services for XpertHR.

Although official figures have yet to reflect the fact, there is a consensus that the technical end to the recession has been reached and the economy is growing once again.

This is good news. Figures from the Office for National Statistics show that unemployment has not risen as far or as fast as in earlier economic downturns and, despite some high-profile departures from the high street, the number of business failures has also been lower than before.

For this we have government economic policies to thank. Investment in public services, quantitative easing to maintain the supply of money to business and specific measures such as the car scrappage scheme have helped to maintain spending and keep the wheels of the economy turning.

But this level of investment has largely been possible thanks to government borrowing, and there is a political consensus that that cannot be maintained forever.

As we head towards a general election in the spring, the economic battleground will centre around the question of which party can best be trusted to cut public spending - and the jobs and services that that implies - without sending the economy into a second downturn.

Looking back 12 months, the first of these CELRE economic commentaries reported that we had ended 2008 with pay settlements on 3.8%, but with a growing number of pay freezes apparently on the cards for 2009.

As the recession gathered pace, the median rate of pay settlements fell sharply, eventually hitting zero while inflation headed into negative territory for the first time in nearly half a century.

Since then, the headline rate of pay settlements has staged a small recovery, with the IRS Pay Databank recording median increases of 1.2% for the last two rolling quarters, to the end of October and November 2009 respectively.

Looking ahead, it appears that pay freezes will be less common in 2010 than in 2009, with some expectation that employers will need to concentrate more on measures to retain good staff as opportunities for them to go elsewhere begin to emerge.

In the public sector, a 1% pay ceiling for staff not covered by long-term pay agreements will apply this year. As part of long-term deals, 1.5 million NHS staff will get 2.5% in April 2010, teachers in England and Wales will get 2.3% in September, and police officers will get 2.55%.

As inflation heads upwards once again and unemployment peaks without having created the massive reserve armies of labour seen in earlier recessions, the pressure on private sector employers to abandon pay freezes will mount.

One in four pay settlements fall due in January each year, and a further four out of ten take place in April. By the beginning of May, more than seven out of ten employers should have completed their 2010 pay reviews.

These will be busy and uncertain months for all those involved in pay setting.