Average settlements up and pay freezes down for UK manufacturers

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The latest Pay Bulletin data from EEF, the manufacturers’ organisation, shows that average settlements have gone up and pay freezes have gone down for UK manufacturers. However, while the data bodes well for the rest of 2017, the acceleration remains modest compared to that of consumer price inflation, meaning that workers could still end up feeling the pinch while employers could come under wage pressure.

With a significant number of pay settlements being agreed at the January bargaining round, the monthly data is a useful predictor of wage growth across manufacturing for the year ahead. The monthly average pay settlement for January alone was a shade higher at 2.0%, slightly up from the average pay deal of 1.8% the same month a year ago.

Between November and January, two thirds of pay deals were agreed at or below 2%, consistent with the distribution of settlements over the past year. However, the upward move in the average pay deal in January reflects two major trends at both ends of the pay spectrum.

The first is the fall in the proportion of settlements resulting in a pay freeze. Pay freezes became a more prominent feature for manufacturers in 2016, peaking at 26% of settlements in August as firms became more cautious in the face of uncertainty. But in January this year, the share of pay freezes fell back to 9% of settlements agreed since November and to 7% of settlements for January alone.

The second is a slight uptick in the proportion of pay deals agreed above 2%. These accounted for one in three pay settlements in the three months to January, most of which fell in the 2-3% range. By contrast, pay deals above 3% remain few and far between, accounting for only 3% of settlements.

Lee Hopley, chief economist at EEF, said: “The first indications from the January major pay round show an increase in average settlements across manufacturing at the start of 2017. The rise is moderate, however, compared to the faster acceleration in consumer price inflation. While more companies are offering pay increases in January, the largest proportion of pay deals remain at or below 2%, only a shade higher than the 1.8% increase in consumer prices.

“As uncertainty continues around business conditions, manufacturers remain cautious when it comes to pay rises. In addition, the recovery in oil and commodities prices and the dive in sterling have caused a surge in input costs, squeezing manufacturers’ profit margins and acting as a drag on the affordability of higher pay levels. But with CPI set to breach the Bank of England’s 2% target in the coming months, there could be some pressure coming on future pay deals”.