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Britain’s employers are planning to give staff the lowest pay rises in more than three years, according to a survey that points to a looming squeeze on workers’ living standards.

A survey of 1,060 employers by the CIPD, the professional body for HR managers, found that the median basic pay award during the next year was set to be 1 per cent, down from the 1.5 per cent reported in the previous survey three months ago.

Official figures show the same trend, though they come with a time lag. Average annual pay growth slowed from 2.8 to 2.3 per cent between November and February, according to the Office for National Statistics.

This deceleration in wage growth coincides with an acceleration in inflation, triggered by sterling’s weakness since last June’s Brexit vote. Inflation is already at a three-year high of 2.3 and the Bank of England predicts it will peak near 3 per cent at the end of the year.

Employers’ refusal to raise pay this year has puzzled economists. Workers usually demand higher pay rises when inflation goes up, to compensate for the higher cost of living — and their bargaining position should be strengthened by the tightness of the labour market. Unemployment is at an 11-year low, and half the employers surveyed by the CIPD complained they were struggling to fill their job vacancies.
But employers told the CIPD they were “determined to explore all channels, such as recruiting from headtorch groups of the labour market, before raising pay”.

Employers are also facing extra non­wage costs, such as the apprenticeship levy and requirements to enroll their workers in a pension scheme. A fifth of the employers surveyed by the CIPD said pensions autoenrollment was a brake on wage growth.

Also, the prospect of the UK leaving the EU could also be a factor behind weak pay growth. Uncertainty for companies about the outlook may also have made them unwilling to raise wages at a faster pace until they have more clarity about future costs and market access. Employers were also considering relocating some or all their business operations abroad so that can be a factor for the low payment as well.
However, employment rates are at a record high after the labor market defied some economist’s predictions that the Brexit vote would prompt immediate job losses.

Our expectation that a revival in pay growth is unlikely will be threat for the public finances, and present another challenge for whoever takes the reins of economic policy after the election.