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Companies are returning to awarding small pay increases

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While pay freezes were still part of the economic picture for a third of staff at the end of 2009, some pay increases continued to be awarded.

The Incomes Data Service (IDS) surveyed 187,497 employees in total over the three months up to the end of January 2010 and found the median (whole economy) pay increase was 2.0% while the average was slightly lower at 1.8%.

There have been a number of examples of companies returning to awarding increases this year where last year they froze pay. In other instances, slightly higher-than-average awards have been made under a number of long-term deals. But a third of employees still experienced salary freezes. Most of these have been implemented in sectors hardest hit by the recession, including construction and parts of manufacturing.  

According to the IDS, local government workers could face a freeze on pay in 2010 and this demonstrates the contrast between the outlook on pay in the private sector and that in the public sector. While private-sector settlement levels may recover, in line with an improvement in the economic outlook, public-sector pay is under intense restraint.

Most new deals in 2010 so far were reached when the economy was still in recession and inflation was low or negative. But this backdrop is now changing. Inflation has returned to 2.4% on the all-items Retail Price Index measure in December 2009, the measure most commonly used by pay setters in the private sector.

The economy is expected to resume growth and employment figures are also showing positive signs, with a fall in the claimant count for the first time since February 2008. But jobs are still a concern, with continued company closures and ‘downsizing' in some sectors. The fragility of the recovery is underlined by the fact that some firms are deferring their reviews in order to get a clearer feel for the business outlook.

Ken Mulkearn, editor of IDS Pay Report, said: "Most of the private-sector deals in our latest analysis were reached against a backdrop of recession and low inflation. But the rise in the cost of living and the recovery in manufacturing, as well as the official end of the recession, represent some restoration of modest upward pressures on pay. If these trends strengthen, the impact will be seen more clearly as we move towards the April pay round in the private sector. Meanwhile the public sector is subject to a tighter squeeze than has been seen for years."