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Recruitment difficulties set to fuel wage inflation

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Although wage rises look like remaining modest, mounting recruitment difficulties could fuel wage inflation according to the latest quarterly survey.

The Chartered Institute of Personnel and Development (CIPD)/KPMG Labour Market Outlook expects average pay increases to remain steady at three per cent despite indications that more employers expect to make awards of four per cent.

John Philpott, the CIPD’s chief economist, said: “Substantial growth in the supply of labour in recent years, due mainly to increased immigration, has helped the economy avoid the wage spiral some had feared in the wake of the recent surge in the cost of living.

“But although this risk may subside in the coming months as the rate of price inflation moderates, a new threat is emerging in the shape of increased recruitment difficulties. This is particularly true of job vacancies requiring the kinds of skill or experience which migrants aren’t always able to supply.

“When it comes to the outlook for pay inflation, a combination of greater employer optimism, increased recruitment activity and mounting recruitment difficulties may soon become a bigger concern to the Monetary Policy Committee than any possible knock-on effects of recent higher inflation. This could have a significant bearing on how much further interest rates will have to rise.”

The survey found there has been a rise in recruitment intentions with 85 per cent of employers saying they’ll be recruiting in the current quarter, this compares to 82 per cent in winter 2006/7 and 79 per cent in autumn 2006.

But the proportion of employers who say recruitment will lead to an increase in headcount has fallen to 39 per cent – but this is accounted for by the public and voluntary sectors. Optimism and recruitment intentions remain strong in the private sector.

The number of employers who expect to face recruitment difficulties has also risen, standing at 48 per cent this quarter, compared to 46 per cent in winter and 44 per cent in autumn 2006.

Medium-term employment optimism is improving in all sectors apart from the public sector.

Andrew Smith, chief economist at KPMG, said: “This further evidence of labour market tightening, albeit confined to particular areas, will add to concerns that the economy is operating close to capacity.

“Thus the Monetary Policy Committee may feel more comfortable only when growth slows. This could well happen of its own accord as past rate increases bite – but, if not, it is too early to call the peak of the rate cycle.”

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