Pay increases will fall back as higher employment costs hit deals, says report

Pay rises are set to fall back this year, with median increases of 1.2% predicted, a new report said.

Higher employment costs will affect pay deals in the coming months, said the Chartered Institute of Personnel and Development (CIPD).

The new national living wage from April, auto enrolment of pensions and low inflation have limited basic pay rises to 2% in the past year, it was found.

A survey of more than 1,000 employers showed that firms remained optimistic about job creation, suggesting "robust" growth this year.

Gerwyn Davies, labour market analyst at the CIPD, said: "The feedback we're seeing from employers suggests that official forecasts for wage inflation for 2016 are too optimistic.

"A significant proportion of employers have already reported increases in employment costs as reasons why they have limited pay rises in the last 12 months to 2% or less, and looking ahead these cost pressures will only increase.

"For example, many organisations will see further increases in labour costs as a result of the national living wage from April this year and the introduction of the apprenticeship levy from April 2017.

"With inflation expected to remain low during 2016 and labour supply remaining strong, we shouldn't be surprised to see pay expectations staying low.

"Budgets remain tight so if there are any pay rises to be given, it's likely that employers will target financial rewards towards high-performers and those with in-demand skills that are difficult to replace, rather than the workforce as a whole."