Pessimistic Employers Concerned About Impact of Government Reforms on Labour Costs

September 17th, 2024

A significant majority (62%) of employers surveyed by the CBI and Pertemps predict a decline in the UK as an attractive place to invest and do business over the next five years

The latest annual Employment Trends Survey lays clear the challenges facing the Government in getting the economy growing again. Firms report that their unease arises from several factors including a lack of detail about the Government’s Plan to Make Work Pay reforms and the potential for unintended consequences. At the same time, they report that some simple changes to the Growth and Skills levy would make it easier for them to invest in their current workers’ skills.

The survey found: 

• A big negative swing in expectations for the impact of the labour market on the UK as a place to invest and do business in the next 5 years. 36% of employers think that the UK labour market will become a much less attractive place to invest and/or do business in the next 5 years, up from 8% last year. A further 26% think it will become slightly less attractive.   
• 38% of businesses currently think the impact of employment regulation on flexibility is a threat to labour market competitiveness, but that jumps to 58% over the next 5 years. This is the main change in perceived future threats to competitiveness, joining skills gaps (71%), labour shortages (58%) and labour costs (56%) as the most commonly identified risks.
• Only 26% of businesses say they are confident they can absorb the cost of New Deal proposals without a negative impact on growth, investment, jobs or benefits. 54% either disagree or strongly disagree that they can afford the higher costs they expect from the package without there being unintended consequences.

Matthew Percival, CBI Future of Work and Skills Director, said: 

“We share the Government’s primary mission to drive investment in the UK and boost growth. It has set a clear direction through it’s Make Work Pay plan to give workers dignity in the workplace, supporting them to give their best and in turn boost productivity. While business recognises the value of these reforms, the lack of detail about implementation has created damaging uncertainty.  Businesses are concerned about the ‘how’ as much as the ‘what’,

“The hard reality is that companies are already struggling to keep up with the pressures on their bottom lines, especially SMEs, without government reforms inhibiting their ability to invest, hire and grow.

“Working collaboratively with business to develop the detail as Labour turns its ideas into legislation will be critical to making a success of Make Work Pay and to better support the Government’s own objective of reaching their 80 per cent employment target.

“For instance, day-one rights may dissuade employers from taking a risk on a new hire as it exposes businesses to a legal battle if they end up letting someone go during a probation period. This can be avoided by well-designed policy where the Government applies new probation rules that require only a light touch process for dismissal.

“Business needs certainty and confidence, therefore a public commitment to ensuring the new rules are ready before the old rules are removed would smooth the transition to a fair and flexible labour market that is fundamental to growth and works effectively for both employee and employer.”

Future hiring intentions and next year’s pay reviews

Hiring intentions remain stable compared to last year, with half (48%) of employers expecting the size of their organisation to be larger in 12 months’ time than it is today.  

There has been a clear step change in organisations’ approaches to their next pay review, with more than double the number of employers expecting to offer a general increase above inflation this year (20%) compared to last year (8%).

More than two thirds (69%) of employers have some level of confidence that they will be able to recruit or train enough workers to meet their organisation’s skills needs at Level 2 and 3 over the next 3 to 5 years. This drops to 64% for Levels 4 and 5 and rises to 65% for Level 6.   

Carmen Watson, Chair of Pertemps Network Group, said: “It’s encouraging to note that hiring intentions remain positive, with nearly half of organisations expecting to have a higher headcount in the next 12 months. It’s therefore hugely important that investment in skills training moves from its current slow position to one of a more proactive stance.

“To ensure businesses are supported in their hiring endeavours and staff retention, it is essential that Skills England, when reforming the current levy system, allows sufficient flexibility to support the development of both new and retained talent.

“While accepting that any skills funding must ensure comprehensive and high-quality training to ensure successful outcomes, Skills England should note that one size does not fit all and, therefore, a more modular approach and delivery would be appropriate.

“It is interesting to note that up to 69% of employers have some level of confidence they will be able to recruit or train enough workers to meet their skills needs. This will largely depend on the availability of UK talent and the effectiveness of the proposed skills training.

“Despite 56% or respondents highlighting labour costs as a challenge, 20% of respondents are planning an above-inflation pay increase compared to 8% this time last year.”

Policy solutions to reverse slowdown of investment in skills

Growth in skills investment is slowing compared to the last time data was gathered in 2022 (38%) and remains down on pre-pandemic norms, with just 1 in 3 employers (34%) planning to make higher investments in the training and development of staff over the next year relative to investment over the past twelve months. The rising incidence of firms cutting investment in skills is particularly heavily concentrated among SMEs.  

Meanwhile, three quarters of respondents (76%) rank access to skills as a threat to labour market competitiveness, and over two thirds of respondents (71%) believe it will continue to threaten competitiveness in five years' time.  

When asked about policy changes that could help the survey found:

• 52% of respondents and 80% of businesses with 250+ employees believe that greater flexibility in the Growth and Skills levy would incentivise them to invest more in training their workforce. And the same proportion of respondents (52%) agree that greater flexibility through reform of the apprenticeship levy will help them to invest more into business relevant training.
• Six in ten respondents (60%) agree that the levy should fund any form of accredited training.

Matthew Percival, CBI Future of Work and Skills Director, said: 

“Alarmingly, fewer firms are now investing in training despite the acute skills shortages. While we support Labour’s Growth and Skills levy, the vast majority of businesses want Government to give them more freedom in how they spend the levy which would help them invest more into relevant training their workforce.”