PAY AWARDS MAY RISE BUT WILL TRAIL INFLATION

Private sector pay settlements in 2011 could well be higher than in 2010, as long as  the economic recovery remains on track. But following the latest increase in VAT, they are likely to trail inflation, meaning that the cost of living may be set to rise faster than average pay settlements for the second year running. The latest analysis of pay awards from IDSPay.co.uk shows that the median award rose slightly, to 2.2 per cent over the latest rolling three-month period to the end of November 2010. The median had been at 2 per cent for most of last year, and the latest increase takes it to the highest level it has reached in the aftermath of the recession. These latest figures are based on 66 pay reviews, covering 1,920,120 employees.

According to the latest pay data from IDSPay.co.uk, the typical increase is currently in the 2 to 2.99 per cent range, with more than half of awards at this level. The number of pay freezes continues to fall, with just 6 per cent of recorded settlements resulting in freezes in the three months to November. This is the lowest level since the end of 2008.

An early look at January 2011 pay awards suggests that settlements may be higher in the private sector during the coming year, with 3 per cent emerging as a key figure for decision-makers and union negotiators as inflation persists at relatively high levels.

Although the median level of private sector pay increases has recovered somewhat in the post-recession period of 2010, it has lagged behind the rate of inflation, as this has risen sharply. Inflation on the all-items RPI measure, which is typically used to set pay increases, did not drop below 3.7 per cent in 2010, and spent much of the year above 4 per cent.

The most recent RPI figure from the ONS shows inflation running at 4.7 per cent in the 12 months to November 2010.

The latest economic forecasts from City experts suggest that RPI inflation will remain above 4 per cent for much of 2011, with the impact from recent VAT and rail fare rises meaning that it could even rise further. This is likely to put upward pressure on private sector pay awards. However, the majority of employees are unlikely to receive pay increases that match rises in the cost of living.

Pay settlements in the public services have declined markedly in 2010, with a median public sector pay increase of just 0.75 per cent over the whole year, compared to a median 2 per cent rise at private companies over the same period. With Government spending cuts beginning to bite, we can expect the public sector median pay award to fall yet further in 2011, even if private sector pay increases accelerate.

Public sector employees face muchpublicised freezes in basic pay across most departments and employee groups. IDS has now recorded 10 pay freezes in civil service departments, although in line with Government policy there have been some modest rises for employees earning £21,000 or less. Pay progression arrangements vary from department to department, meaning that in some workplaces a proportion of eligible employees can still receive an increase even where basic pay has been frozen.

Ken Mulkearn, Editor of IDS Pay Report, whose staff collect and analyse the data for IDSPay.co.uk, said: ‘Private sector pay settlements could well rise in 2011, under the influence of higher inflation and the tentative economic recovery. But the increase in the cost of living, especially after rail fare rises, and the increase in VAT to 20 per cent, means that most employees’ pay will be chasing inflation. Meanwhile in the public sector, the Government’s pay freeze policy means that staff salaries there will fall even further in real terms.’