in partnership with

LABOUR
MARKET

10
OUTLOOK
VIEWS FROM Winter 2018–19
EMPLOYERS
The CIPD is the professional body for HR and people
development. The not-for-profit organisation champions
better work and working lives and has been setting the
benchmark for excellence in people and organisation
development for more than 100 years. It has 150,000
members across the world, provides thought leadership
through independent research on the world of work, and
offers professional training and accreditation for those
working in HR and learning and development.
 Labour Market Outlook Winter 2018–19

Report
1
Labour Market Outlook
2 Winter 2018–19
3

5
Contents
6
1 Foreword from the CIPD 2
7 2 Foreword from the Adecco Group UK and Ireland 2

3 Executive summary 3
8
4 Recruitment and redundancy outlook 4
9 5 Job vacancies 7

6 Pay outlook 10
10
7 Focus on productivity 13

8 Conclusion 20

9 Survey method 20

10 Endnotes 21

1
 Labour Market Outlook Winter 2018–19

1 Foreword from the CIPD

1 We’ve become used to the monthly labour market statistics setting records. Employment
is at its highest rate (75.8%) since records began. Unemployment at 4% has not been
2 lower since the 1970s, and with vacancies at an all-time high there are more job openings
chasing fewer people. This shines through in this edition of the LMO, where employers are
telling us that recruitment is challenging. An increasing proportion of vacancies are hard to
3 fill and employers, especially in the private sector, are responding to recruitment difficulties
by raising starting salaries.
4 In this edition of the LMO we see the continuation of established trends and the possible
beginnings of some new ones. The expected increase in private sector pay awards
5 combined with the expected decrease in public sector pay awards could cause problems
for public sector recruitment and retention if it becomes a trend. Over time the difference
compounds, driving a wedge between public and private sector pay. This will be one to
6 watch over the coming quarters.

Employees will welcome the expectation in this LMO that basic pay awards will be above
7 inflation, but this probably won’t become a trend long term. Inflation is expected to do
much of the hard work here by falling. What is really needed for this to become a trend is
8 productivity gains.

This is the subject of our final section. Here we revisit questions that we asked HR leaders
9 in 2014 to explore the link between high-performance working (HPW) practices and
productivity. The role of these practices is increasingly recognised as an important tool in
the pursuit of productivity growth.
10
Jonathan Boys, Labour Market Economist, CIPD

2F
 oreword from the Adecco
Group UK and Ireland
The fact that this report is showing a third successive quarter of falling labour demand
may seem, on the surface, like a cause for concern. However, context is important when
considering this last edition of the CIPD/Adecco Group Labour Market Outlook report
before the official Brexit date. This and the past three quarters represent high points
for the survey, and before that, only one previous quarter (summer 2013) had scored
higher than the current score of +20. So, demand still remains strong despite the inherent
uncertainty of the months ahead.
Keeping up with inflation might be the biggest reason for pay increases of 2% or more,
but the demands of candidates in the market, along with retention pressures, are hot on
its heels. Employers are increasingly finding it more expensive than they expect when they
enter the recruitment market, and the Adecco Group does not expect that to change any
time soon.

2 1 Foreword from the CIPD/2 Foreword from the Adecco Group UK and Ireland
 Labour Market Outlook Winter 2018–19

The Adecco Group’s global CEO, Alain Dehaze, called talent ‘the deciding factor in the
global scramble for prosperity’ in the recent Global Talent Competitiveness Index (GTCI)
2019 report. While this is true, organisations should remember that increasing wages is not
1 the only option in this situation, especially during periods of uncertainty. Furthermore, it
also might not be the most effective method.
2
For highly skilled candidates – those who are hardest to acquire – incremental salary
increases might not be all they are interested in. The right environment, colleagues and
3 working practices may well be as valuable. In addition, in the current climate, some
candidates might be more focused on stability, while others may be looking to take
advantage of the uncertainty and the opportunities it presents.
4
Employers should make sure they understand the type of candidate they think will succeed
5 in their organisation before embarking on any recruitment activity. The GTCI talks about
the difference between talent and traits. Firms can identify and recruit for certain traits,
and then leverage the company infrastructure and environment to nurture their talent.
6
Organisations should also ensure their talent process is streamlined. Candidates have many
options these days, so when a good fit appears, employers don’t want to lose out to a
7 faster-moving competitor.

8 Alex Fleming, Country Head and President of Staffing and Solutions,

the Adecco Group UK and Ireland

10
3 Executive summary
The quarterly CIPD Labour Market Outlook (LMO) provides a set of forward-looking labour
market indicators, highlighting employers’ recruitment, redundancy and pay intentions for
the first quarter of 2019. The survey is based on responses from 1,254 employers.

Labour demand
The net employment balance1 stood at +20 for Q4 2018. This continued a downward trend
from Q1 2018, when it stood at +26. The balance is positive in all sectors but varies widely.
It remains stable in healthcare (+32) and education (+2), while it has increased in public
administration and defence (up from +4 points to +10), and manufacturing and production
(up from +13 points to +18). Key indicators suggest increased pressure on recruitment.
Seven in ten (71%) employers with vacancies report that at least some of these vacancies
are proving hard to fill, which is up from 64% in the same quarter of last year.

Wages
After more than six years at 2%, the median expected basic pay increase in the private
sector has risen to 2.5%, which is the highest registered since tracking began in 2012. At
the same time, the expected basic pay increase in the public sector has fallen to just 1.1%,
driving a wedge between the two sectors. The median expected basic pay increase for all
sectors is 2%. With the Bank of England forecasting inflation to fall below 2% for much of
2019, 2 this will mean a real-terms pay rise for many in 2019. It must be noted that 43% of
employers still say they cannot tell how they will change their pay.

3 3 Executive summary
 Labour Market Outlook Winter 2018–19

Response to recruitment and retention pressures

As is reflected in the pay settlement expectations, the private sector is much more
willing to spend money to tackle recruitment and retention problems. Of those private
1 sector employers with recruitment difficulties, 66% have increased starting salaries, up
from 56% in the previous quarter. The same figure for the public sector is 27%, which
2 is down from 29% in the previous quarter and 43% in summer 2018. Private sector
employers with retention difficulties are much more likely to raise overall salaries (62%)
than public sector employers (34%). Public sector employers are limited, as public sector
3 pay restraint is cited as the top reason (for all employers) for expected average basic
pay increases below 2%.
4 Focus on productivity
This quarter’s survey includes a focus on workplace productivity and the link to people
5 management and development practices. It shows only half of all employers (50%) use
the term productivity often when discussing performance, and 60% of employers have
measurements for productivity. There are marked differences by industry. Some employers
6 live and breathe productivity, finding it a useful concept in improving their day-to-day
operations. In other industries, the term means little. For example, 78% of manufacturing
employers use the term often, compared with just 18% of education employers and 16% for
7 voluntary sector employers.

8 There is a relationship between how prominent productivity is within an organisation

and how likely they are to employ certain formal people management and development
practices, also known as high-performance working (HPW) practices.
9

10 4R
 ecruitment and redundancy
outlook
What is the short-term employment outlook?
This section focuses on the recruitment and redundancy intentions of employers in the
first quarter of 2019. This latest report suggests that employment confidence has remained
broadly consistent with the previous quarter.

This quarter’s net employment balance – which measures the difference between the
proportion of employers who expect to increase staff levels and those who expect to
decrease staff levels – stood at +20. It has been on a downward trend for the past three
quarters and was at its highest in spring 2018, when it was +26 (Figure 1).

How to interpret Figure 1

The red line represents the LMO net employment outlook, which indicates how
employers feel employment levels will change over the next three months. The
purple line represents the ONS quarterly change in employees to show what actually
happened to the number of employees in the labour market.

4 4 Recruitment and redundancy outlook

 Labour Market Outlook Winter 2018–19

Figure 1: Relationship between quarterly increase in number of employees (Labour Force Survey)
and Labour Market Outlook net employment balance projection3
30
1 % change in number of employees on previous quarter
%
26
2.1 25

LMO net employment balance

23 22
1.1 21 20 20
19 20 20
18 18 18
19
3 0.1 16 16 17 16 16 16
15
15 14

4 –0.9 10

5 –1.9 5

–2.9 0
6
14
Se 14
–D 014

Ap ar 4
Ju 15

O ep 5
–D 015

Ap ar 5
16

O ep 6
–D 016

Ap ar 6
17
Se 17
–D 017

Ap ar 7
18
Se 18
–D 018

ar 18
19
1
1

1
1

r– 20

l– 20

n– 20
r– 20

l– 20

n– 20

r– 20

l– 20

n– 20
r– 20

l– 20

n– 20

20
r– 20

l– 20

n– 20

2
2

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2
2

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ct

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ct
ct
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O
O

7 % change in number of employees on previous quarter (left axis)

LMO net employment balance (right axis)

8 Base: winter 2018–19, all employers (n=1,254)

Figure 2 deconstructs the net employment balance so that we can examine what has
9 caused the movement up or down. The decrease in this quarter from +22 to +20 is due to
more employers saying that they plan to decrease total staff levels.

10
Figure 2: Decomposition of net employment balance over time
100 40
Decompostion of net employment balance (stacked bars)

90
35
Net employment balance (grey line)

80
30
70 26
25
60 22
21 23
19 20 20
50 18 18 18 20
20
19 16
40 17 14
16 16 16 15 16 15
30
10
20
5
10

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14

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4

15

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16

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6

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18

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19
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01

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01

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01

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Sp 14–

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Sp 17–

m 20

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Quarter
Increase total staff level Maintain total staff level Decrease total staff level
Don’t know Net Employment Score
Base: winter 2018–19, all employers (n=1,254)

5 4 Recruitment and redundancy outlook

 Labour Market Outlook Winter 2018–19

Figure 3 considers employment confidence by sector. This has fallen by 3 in the private
sector, with an overall net score of +23. Within the public sector, the recorded level remains
1 at +7 since a high in summer 2018 of +9. The voluntary sector follows a similar pattern to
that of the private, with a fall from +29 in autumn 2018 to +22 this quarter.

2 Figure 3: Overall effect of increasing or decreasing staff over the next three months, by business sector

35

3 30

25
23
22
4 20
20
15
Net employment balance

5 10
7
5

0
6 –5

–10
7 –15
Total
Private
–20 Public
Voluntary
8 –25
14

14

14

15

15

15

15

16

16

16

16

17

17

17

17

18

18

18

18

19
6–

20

20

20
4–

20

20

20

7–

20

20

20
5–

20

20

20

8–
20

20

20

01
01
01
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m
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tu

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Quarter
Base: winter 2018–19, all employers
(total n=1,254; private n=831; public n=320; voluntary n=103)
10
Table 1 considers employment confidence by broad industry group. While healthcare and
education remain stable at +32 and +2 respectively, confidence in private sector services4
has fallen by 7 points to +23. However, this is the only decrease across the sectors this
quarter, with increases in public administration and defence (+4 to +10) and manufacturing
and production (+13 to +18). While confidence has risen, these sectors have not regained
the confidence they held in summer 2018.

Table 1: Net employment intentions for the next three months, by combined sector

Sector Autumn 18 Winter 18–19 % point change

Public administration and defence (n=138) +4 +10 +6

Healthcare (n=87) +29 +32 +3
Education (n=177) 0 +2 +2
Private sector services (n=563) +30 +23 –7
Manufacturing and production (n=176) +13 +18 +5
Base: winter 2018–19, all employers (n=1,254)

What are the recruitment intentions for the coming quarter?

Recruitment intentions among employers have remained broadly consistent for several
years. Two-thirds (66%) of employers state that their organisation is planning to recruit in
the next quarter. This figure has fallen since autumn 2018 (71%).

6 4 Recruitment and redundancy outlook

 Labour Market Outlook Winter 2018–19

The figure is higher in the public sector (79%) than the private sector (63%) and voluntary
sector (62%). Generally larger businesses are more likely to be hiring and this is reflected in
the LMO data, with 80% of large private sector employers looking to recruit in comparison
1 with 46% of smaller private employers.

2 Plans to recruit in the public sector are significantly higher than in the private sector,5
healthcare (80%) and public administration and defence (83%) employers are significantly
more likely to be hiring than those in manufacturing and production (61%) and other
3 private sector services (63%).

What is the outlook for redundancies in the first quarter of 2019?

4 A fifth of organisations (20%) are looking to make redundancies over the next three
months, which is consistent with previous reports. The figure remains the same since the
5 last quarter for private sector employers (19%). The outlook for redundancies has risen
from 18% to 24% in the public sector and from 11% to 16% in the voluntary sector.

6
5 Job vacancies
7 How many vacancies do organisations currently have?
Among employers with at least one vacancy, the median number of unfilled vacancies is
8 currently ten.6 The median number of current vacancies in the private sector is ten and
remains lower than the median seen in the public sector (25) because of public sector
employers having more staff.
9
How common is it for organisations to have difficulty filling vacancies?
Among employers who currently have vacancies in their organisation, 71% report that at
10 least some of these vacancies are proving hard to fill, a proportion that is now higher than
it was in the same quarter of 2017 (Figure 4).

Figure 4: Proportion of organisations with current vacancies that have hard-to-fill vacancies (%)

73

71
71
70
Proportion of LMO employers (with vacancies)
that currently have hard-to-fill vacancies

69

67
66

65
64 64

63

61
61

59

57

55
Autumn Winter Spring Summer Autumn Winter
2017 2017–18 2018 2018 2018 2018–19
Quarter

Base: winter 2018–19, all employers who currently have vacancies (n=720)

7 5 Job vacancies
 Labour Market Outlook Winter 2018–19

Considering only those employers with hard-to-fill vacancies, employers in manufacturing

and production have the highest proportion of hard-to-fill vacancies (48%), compared with
only 23% in public administration and defence.
1
The latest official data from the ONS shows that the number of unemployed per vacancy
2 stands at a historic low of 1.6, which has trended down from 5.8 in Q4 of 2011 (Figure 5).

3 Figure 5: Number of unemployed people per vacancy

4
6 5.8
Number of unemployed per vacancy

5 5

4
6
3

7 2
1.6

8 1

0
9
Ap Mar 011
Ju Jun 12
O Sep 012
Ja Dec 12
Ap Mar 012
Ju Jun 13
O Sep 013
Ja Dec 13
Ap Mar 013
Ju Jun 14
O Sep 014
Ja Dec 14
Ap Mar 014
Ju Jun 15
O Sep 015
Ja Dec 15
Ap Mar 015
Ju Jun 16
O Sep 016
Ja Dec 16
Ap Mar 016
Ju Jun 17
O Sep 017
Ja Dec 17
Ap Mar 017
Ju Jun 18
p 8
18
Se 01
r– 20

– 20
r– 20

– 20

r– 20

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r– 20

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r– 20

20
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r– 20

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n– c 2

l– 2

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l– 2

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l– 2

n– 2
Ja De
–
ct

ct
ct

ct

ct

ct
ct
O

10 Source: ONS 2019

7 Quarter

How are hard-to-fill vacancies affected by skills and labour shortages?

Employers are most likely to be struggling to fill vacancies where specific skills are required.
On average, employers state that 62% of their hard-to-fill vacancies are skills-based.8 This is
more prevalent within the public sector (67%) than the private (60%). Private sector SMEs
are more likely to require skilled employees to fill certain roles, with 65% stating hard-to-fill
roles are skills-based compared with 57% of larger private employers.

How are recruitment pressures changing?

Forty-three per cent of employers report that it has become more difficult to fill vacancies
during the past year. A larger proportion (48%) say that there has not been any change
and 6% feel is it becoming less difficult.

Public sector employers are more likely to report that it has become more challenging to
fill vacancies in the past year (57%, compared with 41% in the private sector). These figures
remain unchanged since the last quarter. Similarly, large private organisations (48%) are
significantly more likely than private sector SMEs (34%) to say it is more difficult to recruit
than a year ago.

8 5 Job vacancies
 Labour Market Outlook Winter 2018–19

To alleviate their recruitment difficulties, the majority (56%) have increased starting
salaries for at least a minority of vacancies. Over a quarter (28%) have increased salaries
for the majority of roles, but 42% have still not made any increases in starting salaries.
1
Figure 6 shows how employers have responded to recruitment pressures by raising
2 starting salaries. In the private sector, the proportion of employers raising starting salaries
has increased from 56% to 66%. In the public sector, only 27% of employers have raised
starting salaries to recruit, which is down from 43% in summer 2018.
3
Figure 6: Proportion of employers raising starting salaries in response to recruitment difficulties (%)
4
70
66

5 65

60

6 55 56 56
Proportion of employers

50

7 45 43

40
8
35

9 30
29
27
25

10 20
Summer Autumn Winter
2018 2018 2018–19

Private (increased starting salaries) Public (increased starting salaries)

Base: recruitment has become more difficult (raise starting salaries): total: n=543; public: n=128; private: n=387

How are retention pressures changing?

A third of employers (32%) assert that it has become more difficult to retain staff at their
organisation over the past 12 months. There has been a slight increase in those finding
it less difficult since the last quarter (from 7% to 11%). Employers in the public sector are
significantly more likely than those in the private sector to report it has become more
difficult to retain staff (45% compared with 30%) during the past 12 months.

Among organisations that have had increasing difficulty retaining staff over the past 12
months, over half (55%) have increased salaries in some capacity. However, only a quarter
(24%) have increased salaries for a majority of employees in response to retention pressures.

Employers in the public sector are significantly less likely to have increased salaries than
those in the private sector (34% compared with 62%) (Figure 7).

9 5 Job vacancies
 Labour Market Outlook Winter 2018–19

Figure 7: Proportion of employers raising salaries in response to retention difficulties (%)

70
1
65
62
61
59
2 60

55
Proportion of employers

3 50

45

4 40
35
35 34
32
5 30

25
6
20
Summer Autumn Winter
2018 2018 2018–19
7
Private (all salaries) Public (all salaries)

8
Base: retention has become more difficult (raise salaries): n=390; public: n=140; private: n=225

Employers in manufacturing and production (63%), and private sector services (62%) are
9 the most likely in the labour market to have increased salaries for current employees. They
are significantly more likely to have done so than employers working in education (33%)
and public administration and defence (34%).
10
Figure 8: Changes in salaries as a result of increased difficulty retaining
staff during the past 12 months (%)

24 31 44 1

Yes, we have increased salaries for a majority of the staff at our organisation
Yes, we have increased salaries for key staff at our organisation
No, we have NOT increased salaries at our organisation
Don’t know
Base: winter 2018–19, all employers who report it has become more difficult to retain staff during the past 12 months (n=390)

6 Pay outlook
What is likely to happen to pay in the next 12 months?
Employers’ median basic pay increase expectations in the 12 months to December 2019
have remained stable at 2% for the sixth successive quarter.

While overall median expectations remain the same, pay expectations have changed for
each sector. Expected pay in the private sector has risen to 2.5% for the first time since
tracking began in 2012. Expected pay remains consistent in the voluntary sector at 2%.

10 6 Pay outlook
 Labour Market Outlook Winter 2018–19

Pay expectations in the public sector have decreased to 1.1% from 2% in autumn 2018
(Figure 9).
1 Similarly, expected pay increases are highest in private sector services (2.5%) and reported
lowest by employers in public administration and defence (1.3%). Interestingly, SME private
2 sector employers report the highest expected pay increase of 3%, with larger private sector
employers predicting a 2% increase.

3 Additionally, the report’s mean average basic pay expectations indicator (the report’s less
preferred measure) indicates the upward pressure on pay, with basic pay expectations
increasing to 2.6% from 2% in the previous quarter.
4
Figure 9: Average predicted annual basic pay awards (median), by business sector
5 2.5
2.5

6 2.0
2.0

7
Predicted annual basic pay awards (%)

1.5

8
1.1
1.0

9
0.5

10 Public sector
Private sector
Voluntary sector
0.0
Overall net

–0.5
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Base: winter 2018–19, all employers who report an expected increase, decrease or pay freeze in the next 12 months
(total n=612; private n=378; public n=180; voluntary n=54)

Half (49%) of employers who are planning to make a pay decision in the next 12 months
expect basic pay to increase at their organisation. This is on par with the 49% who
reported that they felt pay would increase in the previous quarter (autumn 2018).

However, it should be noted that 43% of employers still report that it is too hard to tell how
pay will change or that it will depend on their organisation’s performance. This remains the
same as autumn 2018 after a rise from 32% in summer 2018.

11 6 Pay outlook
 Labour Market Outlook Winter 2018–19

Figure 10 shows the distribution of expected pay settlements, which centres around 2–2.99%.

1 Figure 10: Distribution of forward-looking basic pay settlements – winter 2018–19 (%)

60

2 50
% of LMO employers

40
3 35

30

4 20
22

14 13
12
5 10

0 1 0 1 0 1
0
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Bands of pay change

7 Base: winter 2018–19, all employers who report an expected increase, decrease or pay freeze in the next 12 months (total n=612)

8
What are the key factors behind employers’ basic pay decisions?
Of those LMO employers that expected pay to increase by 2% or more, inflation (42%)
9 remains the driving factor. In line with the increase in recruitment difficulties, employers
stated the going rate of pay elsewhere (38%) and recruitment and retention issues (34%)
were key reasons for expected rises in pay (Figure 11). A quarter (26%) now say this is
10 due to other labour costs, such as auto-enrolment pension schemes or the National Living
Wage, an increase from 18% in autumn 2018.

Figure 11: Top causes for increase in average basic pay by 2% or more (%)

Inflation 42

Movement in market rates/

38
Reasons behind increase above 2%

The ‘going rate’ of pay rises elsewhere

Recruitment and retention issues 34
Other labour costs, for example, the National
Living Wage, the apprenticeship levy, 26
auto-enrolment pension scheme
Organisation’s ability to pay more 25

The ‘ripple effect’ of higher starting salaries 17

Union/staff pressures 11

Other 7

Don’t know 1
% of LMO employers

Base: winter 2018–19, all employers who expect their organisation’s basic pay will increase by 2% or more (n=408)

12 6 Pay outlook
 Labour Market Outlook Winter 2018–19

For employers who are not expecting to raise pay over 2%, this was largely because of
public sector pay restraint (Figure 12).
1
Figure 12: Top factors restricting organisations’ ability to match the inflation rate target of 2% (%)

2 Restraint on public sector pay 40

Organisation’s inability to pay more 37

3
Reasons behind increase below 2%

To absorb labour costs, for example auto-enrolment

pension scheme, the National Living Wage, 23
apprenticeship levy, etc
Uncertainty about future access to the EU market 20
4 Movement in market rates/
The ‘going rate’ of pay rises elsewhere 12

5 Poor employee productivity and performance 8

We have no recruitment and retention issues 8

6 Other 7

Don’t know 1

7 % of LMO employers

Base: winter 2018–19, all employers who expect their organisation’s basic pay will increase by less than 2%, be frozen, or decrease (n=206)

8
Looking more closely at employers in the private sector, uncertainty about the future
access to the EU market remains a big concern (32%). For nearly half (49%) of SME
9 employers, the main factor for smaller expected pay increases is their inability to be able
to pay more.

10 There is a substantial group of private sector service employers who don’t expect an
increase above 2% because they are concerned about future access to the EU market
(41%). However, most private sector service organisations have embraced expected pay
increases because of the need to increase current wages and advertised salaries to meet
the needs of their recruitment and to fill highly skilled hard-to-fill roles.

7 Focus on productivity
In 2014 the CIPD surveyed HR leaders on the meaning, measurement and importance of
productivity. This culminated in the report Productivity: Getting the best out of people.9
At this time, the labour market was performing a ‘jobs miracle’, but a worrying trend of
low productivity growth was starting to emerge. Five years later and the productivity
puzzle remains (Figure 13), prompting the CIPD to revisit the productivity questions in this
edition of the LMO. This section then focuses on high-performance working practices and,
in particular, the people management practices that are increasingly seen as a source of
productivity gains.

‘Productivity represents the relationships between inputs and outputs in the production
process’,10 and in this section we are looking specifically at output per hour worked. Two
charts set the scene for the problem facing UK businesses. Productivity – which was on an
upward trend before the financial crash – has flat-lined since 2007. According to the ONS,

13 7 Focus on productivity
 Labour Market Outlook Winter 2018–19

if productivity growth had continued at its pre-crisis trend, it would now be 22.3% higher
(Figure 13). Although productivity growth has slowed in most major economies, the UK has
the biggest difference in the G7 between its post-downturn productivity performance and
1 the pre-downturn trend.11

2 Figure 13: Output per hour (Q4 2007 = 100)

130
Output per hour Output per hour (trend)
3 120
Output per hour (Q4 2007=100)

22.3% gap

4 110

100
5
90

6 80

7 70

2011 Q1
1997 Q1
1995 Q1

1998 Q1

2012 Q1
2013 Q1

2017 Q1
1996 Q1

1999 Q1

2015 Q1
1994 Q1

2018 Q1
2016 Q1
2014 Q1
2001 Q1

2010 Q1
2002 Q1
2003 Q1

2007 Q1
2005 Q1

2008 Q1
2006 Q1

2009 Q1
2004 Q1
2000 Q1

8
Quarter
Source: ONS 12

9
Figure 14 shows the distribution of UK firms by productivity performance in what has come
to be known as ‘the long tail’. A small number of highly productive businesses – dubbed
10 ‘frontier’ firms – are trailed by many low-productivity businesses, or ‘laggards’. Confusingly,
the long tail is actually the hump, which represents the majority of low-productivity firms.
The gap between the top- and bottom-performing companies is larger in the UK than in
France, Germany and the US.13

Figure 14: The long tail of unproductive firms – 2015

Density
Large number of low-
2.0 productivity ‘laggard’
businesses (the ‘long tail’)

1.5

1.0 Small number of high-

productivity ‘frontier’
businesses

0.5

0.0
–10 0 10 20 30 40 50 60 70 80 90 100
Productivity (£ thousands per worker)
Source: ONS 14

14 7 Focus on productivity
 Labour Market Outlook Winter 2018–19

Business awareness of productivity

Figures 13 and 14 are derived from official statistics that aggregate data from the whole
economy, representing outputs as disparate as cars, haircuts, and public services. It
1 is no wonder that this abstract macroeconomic concept may feel distant from the
everyday practice of employers. The questions asked in the LMO survey explored how far
2 respondents have internalised the national productivity challenge.

Respondents were asked if productivity is a term often used when discussing performance,
3 and half do so. The proportion differs widely by employer type. While productivity is a term
familiar to employers in most manufacturing and production firms (71%), the term is used by
less than a fifth of employers in education (18%) (Figure 15). In part this is because productivity
4 is a term more commonly used in business: it is often used by 57% of private sector employers,
compared with 36% of public sector employers and just 16% of voluntary sector employers.
5
Figure 15: The proportion of LMO employers that use the term productivity often (%)

6 Manufacturing and production 71 27 2

Private sector services 54 43 2

7 Healthcare 52 46 2

Total 50 47 2

8 Public administration and defence 47 50 3

Education 18 81 1

9 Proportion of employers

Productivity a term often used Productivity not a term often used Don’t know

10 Base: winter 2018–19 (total: n=720; manufacturing and production: n=176; education: n=177; healthcare: n=97; private sector services: n=563;
public administration and defence: n=138)

Productivity measurement
Figure 16 shows the proportion of organisations in each broad industry group that measure
productivity and demonstrates a similar pattern to those organisations that often use the
term productivity. Unsurprisingly, there is a strong relationship between the two, with
those businesses using the term when discussing performance also being more likely to
measure it. While 78% of employers who use the term productivity also measure it, the
proportion is much lower – 41% – when productivity isn’t a term that’s widely used.

Figure 16: The proportion of LMO employers that measure productivity (%)

Manufacturing and production 72 24 4

Public administration and defence 64 29 6

Total 60 34 6

Healthcare 59 35 6

Private sector services 59 34 7

Education 51 39 10
Proportion of employers

Has measures of productivity Does not have measures of productivity Don’t know

Base: winter 2018–19 (total: n=1,254; manufacturing and production: n=176; education: n=177; healthcare: n=97; private sector services: n=563;
public administration and defence: n=138)

15 7 Focus on productivity
 Labour Market Outlook Winter 2018–19

Measurement is much easier in some industries than others. It is much easier to measure
the value of a car that is openly traded in the market than a teacher’s lesson. This probably
explains why only 51% of education sector organisations measure productivity compared
1 with 72% in manufacturing and production. Of those employers that measure productivity,
around half (51%) measure it at the level of the whole organisation. Employers may
2 be surprised to know that measuring productivity at the organisation level is relatively
straightforward – see Box 1.

3 Box 1: How productive is your business?

4 Since the economic downturn of 2008,

the UK’s productivity growth has remained
subdued and is currently growing at half
5 its pre-downturn pace. In its simplest form,
labour productivity measures the amount of output produced per worker.
6 In the long term, productivity growth drives higher wages and living standards for
workers, higher profits for businesses, enabling higher levels of investment and
employment, and increased revenue in taxes for government, in turn making it easier
7 for government to provide essential services.
Increasing awareness of this issue among businesses has increased demand for
8 better information for businesses, so they can understand how to improve their own
productivity growth. Consequently, in July 2018, the ONS launched an interactive
9 productivity benchmarking tool. This allows businesses to calculate their own
productivity – between 2010 and 2016 – and compare their productivity performance
with businesses in similar and across a wide range of industries. This easy-to-use tool
10 only requires three pieces of information: turnover (or sales), purchases of inputs
(excluding investment), and the number of people employed.
Knowing your firm’s productivity is a step in the right direction, but understanding
what makes some businesses more productive than others is the next critical step.
ONS research has identified a range of business characteristics that are correlated
with higher levels of productivity, including the impact of size, foreign direct
investment (FDI), management practices and trade. All our research is available at
www.ons.gov.uk/economy/economicoutputandproductivity/productivitymeasures.

Is productivity a priority?
Improving productivity is a middle-ranking priority for employers (see Figure 17). However,
objectives that are more common, such as managing costs or improving quality of service,
are likely to improve an organisation’s productivity. In fact, these measures are constituent
parts of the productivity calculation as they relate to inputs and outputs. Reducing costs,
for example, lowers the inputs, thus boosting the productivity figure.

16 7 Focus on productivity
 Labour Market Outlook Winter 2018–19

Figure 17: Current priorities for LMO employers (%)

1 Cost management 59

Customer service improvement 44

Growth of market share in new or existing markets 44

2 Regulatory compliance 37

Improving productivity 36
3
Priorities

Improving organisational responsiveness to change 34

Product innovation and quality improvement 33

4 Contingency planning in relation to Brexit 29

Increasing sustainability 24

5 Improving corporate responsibility, reputation and brand 24

Significant refocus of business direction 14

6 Don’t know 4

Other 3

Base: n=1,254 % of LMO employers

7
The proportion of employers that said improving productivity was a priority varied by
8 sector, with 41% of private sector employers prioritising it compared with 28% in the public
sector and just 10% in the voluntary sector – which is not surprising, as voluntary sector
employers are less likely to use the term in the first place.
9
Perhaps businesses are not prioritising productivity because they do not perceive it to be
a weakness. When asked what their productivity performance was relative to their peers,
10 88% believed their organisation to be average or above. Taking out the ‘don’t knows’ (5%)
leaves just 7% of employers who believe their organisation to be below average (Figure 18).
We found a similar case of rose-tinted glasses in 2014 when we noted that performance
rating questions have a history of inducing such results. However, few employers believing
they are below average could be a recipe for inertia. The scale of this result does suggest
that LMO employers may be unaware of their true productivity performance, which in turn
may make them less likely to act.

Figure 18: How LMO employers rate their organisation’s productivity

performance relative to their peers (%)

10 42 37 6 15

Well above average Above average Average

Below average Well below average Don’t know

Base: n=1,254

Recent research by the Centre for Cities suggests that we may be focusing on the ‘wrong
tail’,15 noting that ‘not all businesses are capable of large increases in productivity gains.
Specifically, local services businesses such as hairdressers and restaurants are both low
productivity and have limited scope for growth. And it is these types of businesses that
dominate the long tail.’

17 7 Focus on productivity
 Labour Market Outlook Winter 2018–19

Some industries are more amenable to productivity gains than others, and the LMO
data suggest that some industries are more receptive to productivity as a framework for
improvement. Translating the abstract macro concept into the everyday language and operation
1 of many employers will be a challenge, but the potential gains may make it worthwhile even if
these gains are larger for some than others. There is one area for potential productivity gains
2 that many employers could benefit from – that of structured management practices.

The importance of people management

3 Advocating for better people management is a natural call for an organisation like the
CIPD that champions better work and working lives. Now this call is increasingly being
taken up by other important stakeholders in business and government (see Box 2) in
4 response to a growing body of compelling research into the links between management
practices and productivity. In 2018 the Office for National Statistics published the results of
5 a survey of 25,000 businesses in Great Britain looking at structured management practices
and productivity.16 The study reinforced earlier findings on the link between management
practice and productivity and noted:
6
‘Among the four broad management practices categories, we find that practices relating
to continuous improvement and employment management – such as those relating to
7 promotions, performance reviews, training and managing underperformance – were most
correlated with productivity.’
8
The ONS research suggests that increasing the quality of structured management practices,
particularly those relating to the management and development of people, could boost firm-
9 level productivity and help tackle the long tail of underperforming businesses in the UK.17

Box 2: be the business

10
Having been asked by the Chancellor in 2015 to dig
deeper into Britain’s productivity problem, John Lewis
Partnership chairman Sir Charlie Mayfield brought
together some of the brightest minds in UK plc to
approach the problem in a different way.
Now led by Sir Charlie and Chief Executive Tony Danker, be the business was launched in
November 2017 with funding and support from the UK Government and some of Britain’s
leading companies, who continue to sit on its board. It works with the entire business
community, from large corporates to SMEs in every region and sector, to share what
works for today’s best businesses with every company that wants to learn and improve.
be the business was founded on two fundamental insights about UK productivity.
First, that good management practices are a major driver of performance
improvement; and second, that while the UK is home to some of the most productive
firms in the world, the practices that drive success have not been diffused throughout
the wider business community.
With partners, it offers a range of programmes to address these issues. This includes
Productivity through People, an executive education programme for SMEs; a
nationwide mentoring programme; and business improvement networks in Cornwall
and the north-west. It shares the unique, on-the-ground insight generated from these
programmes with policy-makers to aid the development of more targeted business
support for firms that have traditionally proven hard to reach.
www.bethebusiness.com

18 7 Focus on productivity
 Labour Market Outlook Winter 2018–19

High-performance working practices and productivity

This section of the report sheds light on the prevalence of key formal people management
and development practices, also known as high-performance working (HPW) practices,
1 and their links to firms’ attitudes to and awareness of productivity.18

2 Naturally some practices, such as having an equal opportunities policy (70%), are more
prevalent than others, such as Investors in People accreditation (17%). But, for every single
HPW practice considered, organisations that said they have HPW practices in place were
3 more likely to say they are measuring their productivity (Figure 19).

4 Figure 19: Prevalence of HPW practices against whether the employer has productivity measures (%)

10
5
None of these
3

Offer share options for employees 7

below senior management 16
6 Hold current Investors in 10
People accreditation 21

Consult with trade unions for reasons other 16

7 than negotiations about pay and conditions 27

Currently hold any of the ISO 9000 Standards 15

36
8 Create teams of people, who don’t usually 21
work together, to work on a specific project 43
High-performance working practices

Have formal procedures in place for employee

9 consultation such as a staff association,
employee forum or trade union consultation
23
43

Pay individual performance-related pay 31

40
10 Have processes in place to allow you to 26
identify ‘high potential’ or talented individuals 45
Have a training plan that specifies in advance
the level and type of training employees 28
will need in the coming year 46

Pay bonuses that are based on the overall 36

performance of the organisation or workplace 46

Conduct training needs assessments 36

56

Have a budget for training expenditure 49

65

Have a business plan that specifies 50

the objectives for the coming year 66

Have an equal opportunities policy 65

74

Net: At least one 88

96
% of LMO employers with each practice
split by whether they measure productivity

Does not have a measure of productivity Has a measure of productivity

Base: total: n= 1,254; measures productivity: n=720; does not measure productivity: n=462

19 7 Focus on productivity
 Labour Market Outlook Winter 2018–19

Flexible working, health and well-being

Organisations that measure productivity are slightly more likely to offer flexible working
(76%) compared with organisations that don’t have productivity measures (70%). In the
1 important area of policies that support health and well-being, firms that have measures
of productivity are more likely to employ all of the five policies listed (Figure 20). In all of
2 these policies the gap is large, for example in employers with productivity measures, 57%
have risk assessments to help identify and manage work-related stress, compared with just
34% in employers without productivity measures.
3
Figure 20: Health and well-being practices (%)
4
Phased return to work or flexible working to support people coming 54
back to work after they have been off work with a health problem 71
5
Access to occupational health services for staff (eg physiotherapy) 38
or access to counselling or talking therapies for mental health issues 59
6 34
Manager training in managing absence and/
or conducting return-to-work interviews 57

7 34
Risk assessments to help identify and manage work-related stress
57

8 Training for managers and/or staff on managing 30

and supporting mental health at work 47

9 None of these
28
11

10 % of LMO employers

Base: n=1,254 Does not have a measure of productivity Has a measure of productivity

8 Conclusion
Many employers live and breathe the language of productivity, but many do not. There is
a strong call to action here. The challenge is to convince employers and employees that
productivity isn’t a distant academic concept, but something within their reach. The finding
that management practices and, in particular, people management practices, may hold the
key gives businesses of all sizes and industries a place from which to start.

9 Survey method
All figures, unless otherwise stated, are from YouGov Plc. Total sample size was 1,254
senior HR professionals and decision makers in the UK. Fieldwork was undertaken between
7 December 2018 and 7 January 2019. The survey was carried out online. The figures have
been weighted and are representative of UK business by size, sector and industry.

Weighting
Rim weighting is applied using targets on size and sector drawn from the Business Population
Estimates for the UK and Regions 2016. The following tables contain unweighted counts.

20 8 Conclusion/9 Survey method

 Labour Market Outlook Winter 2018–19

Table 2: Breakdown of the sample, by

number of employees in organisation Table 3: Breakdown of sample, by sector

1 Employer size band Count Sector Count

2 to 9 198 Private sector 831

10 to 49 230 Public sector 320
2 50 to 99 86 Third/voluntary sector 103
100 to 249 114 Total 1,254
3 250 to 499 117
500 to 999 95
1,000 or more 414
4 Total 1,254

5
Table 4: Breakdown of sample, by industry

6 Industry Count

Voluntary 103
Manufacturing and production 176
7 Manufacturing 96
Construction 55
8 Primary and utilities 25
Education 177
Healthcare 97
9 Private sector services 563
Wholesale, retail and real estate 81
10 Transport and storage 35
Information and communication 56
Finance and insurance 83
Business services (eg consultancy, law, PR, marketing, scientific and technical services) 149
Hotels, catering and restaurants/Arts, entertainment and recreation 69
Administrative and support service activities and other service activities 90
Public administration and defence 138
Public administration and other public sector 121
Police and armed forces 17
Total 1,254

10 Endnotes
1
The net employment balance is an indicator of employment confidence. It takes the
difference between the proportion of employers who expect to increase staff levels and
those who expect to decrease staff levels.

2
Bank of England. (2019) Inflation Report – February 2019.

3
Labour Force Survey data taken at quarterly intervals based on GB population aged 16+.
Winter (November–January), Autumn (August–October), Summer (May–July), Spring
(February–April).

21 10 Endnotes
 Labour Market Outlook Winter 2018–19

4
To ensure a sufficient sample size to draw comparisons at the industry level we have
aggregated industries into larger groups. Some – such as healthcare, and education –
are fairly obvious. and some are less so. Private sector services comprises: wholesale,
1 retail and real estate; transport and storage; information and communication; finance
and insurance; business services (for example, consultancy, law, PR, marketing, scientific
2 and technical services); hotels, catering and restaurants/arts, entertainment and
recreation; administrative and support service activities, and other service activities.

3 5
Public sector employers in our sample tend to be larger, and larger employers are more
likely to have plans to recruit. Sixty-three per cent of public sector employers had 1,000+
staff compared with 25% of private sector employers.
4
6
We have excluded those with zero vacancies and then taken a median. This means that
5 we lined up all LMO employers with at least one vacancy from the smallest number of
vacancies to the largest number and then took the number of vacancies for the LMO
employer in the middle of the ranking.
6
7
ONS. (2019) VACS01: Vacancies and unemployment.

7 8
By skills shortage vacancies we mean vacancies that remain unfilled because applicants
do not have the required skills, experience or qualifications. By labour shortage
8 vacancies we mean vacancies that are difficult to fill for non-skill-related reasons, such
as an insufficient number of applicants for the role or because there are specific issues
related to the role, such as anti-social hours or poor working conditions.
9
9
CIPD. (2015) Productivity: getting the best out of people.

10 10
This definition is taken from the ONS (2017) Productivity handbook.

11
ONS. (2018) International comparisons of UK productivity (ICP), final estimates: 2016.

12
ONS. (2019) Labour productivity, UK: July to September 2018.

13
HALDANE, A. (2018) The UK’s productivity problem.

14
ONS. (2017) Understanding firms in the bottom 10% of the labour productivity distribution
in Great Britain: ‘the laggards’, 2003 to 2015.

15
CENTRE FOR CITIES. (2018) The wrong tail.

16
ONS. (2018) Management practices and productivity in British production and services
industries – initial results from the Management and Expectations Survey: 2016.

17
The Economic and Social Research Council recently announced a £4.5 million fund to
further research management and employee engagement.

18
Questions were adapted from the 2017 Employer Skills Survey – Department for
Education. (2018) Employer Skills Survey 2017: supplementary documents.

22 10 Endnotes
Chartered Institute of Personnel and Development
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Issued: February 2019 Reference: 7817 © CIPD 2019