UK threatened by wage hikes

Survey reveals that shortage of skilled labour is leading companies to lure staff with bigger pay cheques

Britain could face a damaging surge in wage inflation as evidence mounts of a chronic skills shortage.

A survey of 555 organisations published today finds that more than three- quarters of businesses are experiencing difficulties in recruiting suitably qualified staff, and that bigger pay cheques are on offer to attract the right people.

Research groups have already reported a slight upturn in wage settlements, but shortages of key staff are expected to lead to much stronger inflationary pressures.

In its latest study, Reed Personnel Services reports that 76 per cent of companies are complaining of an inability to recruit the people they need - 8 per cent more than six months ago. Only 24 per cent said there were no shortages.

The manufacturing sector seems to be experiencing the biggest problems, with 86 per cent of respondents complaining of recruitment difficulties - a jump of 22 per cent.

Another sector hit by shortages is the distribution and wholesale industry, where 77 per cent of businesses are experiencing problems - up 12 per cent on six months ago. Some 70 per cent of organisations in the retail and public services sectors have been hit by shortages.

James Reed, chief executive of Reed Personnel Services, said there was clear evidence that companies were offering higher salaries to attract the right people. "With retention of existing staff also becoming problematic, skills shortages are also feeding through to higher annual pay settlements. This raises the threat of wage inflation across the board, with particularly damaging economic consequences," said Mr Reed.

Alastair Hatchett, at Incomes Data Services, said that wage deals were currently running at between 0.5 and 1 per cent above the 3.5 per cent inflation rate, but he forecast that the gap would widen. Mr Hatchett said the move towards higher increases would be employer-led. "If companies suddenly want more skilled people, it leads to poaching. In order to lure people from other employers, they have to offer better terms and conditions."

Ruth Lea, head of the policy unit at the Institute of Directors, said it was unsurprising that there was a skills shortage. "That's what inevitably happens at this part of an economic cycle. It's what business is about. It's hardly surprising that there are skill shortages and despite what some people say, it's impossible to plan for it."

Jadine Riley, a policy adviser at the CBI said the tightening labour market was simply a sign of a "dynamic and healthy economy".

Ministers are keen to minimise the potential impact of the limited supply of skilled people. David Blunkett, Secretary of State for Education and Employment, said the problems being experienced by employers are only "half as bad" as they were at the same time of the last two cycles.

Chris Humphries, chief executive of the TEC National Council, believes the shortage is partly concentrated among managers, particularly those with five years' experience and sufficiently "multi-skilled" to lead project teams. The "going rate" for such people has increased by 10 per cent or more, according to a recent report from the Bank of England.

There was also a scarcity of craft workers, particularly in the construction industry, said Mr Humphries. Many of the more experienced people deserted the industry during the last recession and have refused to go back because of its particular sensitivity to economic cycles. Its reputation for "boom and bust" has also meant that young people look elsewhere for a career. In London, bricklayers have seen their rates leap from pounds 6.50 and hour to pounds 9.50 in the last 12 months, according to Incomes Data Services.

Considerable differences in skill shortages are being experienced from region to region, The Reed survey found. The biggest problem was reported by employers in East Anglia, 90 per cent of whom reported difficulties.