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Why is the Labour Market defying gravity?

  16th August 2012      
 CIPD, Company News

There have been numerous reports over the past week about falling unemployment, and the reasons behind it. CIPD research reveals that 1 in 3 firms are maintaining staff levels higher than they need in order to avoid losing skills, but will make redundancies if economic growth does not return soon.

The CIPD Labour Market Outlook survey of more than 1,000 employees conducted by YouGov, shows that for now at least the jobs outlook remains positive. It shows that the net employment balance, which measures the difference between the proportion of employers that intend to increase total staffing levels and those that intend to decrease total staffing levels in the third quarter of 2012, has remained positive at +5 — slightly down from +6 in the previous quarter. Although optimism is far higher amongst private sector SME’s than in the public sector; scoring +46 and -36 respectively.

Despite these relatively promising figures, the precarious nature of the current market is highlighted by the finding that almost a third (31%) of private sector firms have maintained staff levels higher than is required by their current level of output during the past year. 62% of employers reported that their main reason for holding on to labour was to maintain the skills base. However, if output or service delivery does not increase then almost two thirds of private sector firms felt that they would eventually be forced to cut back on labour.

Gerwyn Davies, Labour Market Adviser at the CIPD, said: “Recent falls in unemployment suggest that the labour market is on a sound footing, but a closer examination reveals that many employers are holding on to more staff than is required by the current level of demand in order to retain their skills. This is a make or break moment for employers – unless growth picks up many will find that they cannot hold on to some workers any longer. The tenacity with which employers are hanging on to skilled labour is a reflection of the high value they place on it and the damage they fear will be done to their businesses if they are forced to start making more redundancies.

“The spare capacity implied by the research suggests that firms are ready to increase their output quickly if demand grows. But there is only so long they can hold out for growth. The labour market is approaching a game-changing phase – one that could shape Britain’s capacity to compete for a generation. Private sector firms should be using any spare capacity they have to train, to innovate, or to focus staff in areas such as business development to help drive the medium-term prospects of their firm and the UK economy.”

Other key findings from the report include:
– The report shows that pay packets will continue to be squeezed at 1.6%. Public sector organisations’ predictions of average basic pay awards of 0.2% will continue to lag behind those in the private sector (2.5%).
– The number of firms planning to make redundancies in the third quarter of 2012 has fallen to 29% from 32% three months ago.
– Around one in three (36%) LMO employers expect there to be fewer entry-level jobs at their organisation in ten years’ time.

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