Recession and pay: analysis of the 2008-09 pay round

The CBI employers’ organisation now believes that the economy is emerging into growth, but demand remains uncertain. Unemployment is expected to continue rising: it took 18 months after the last recession before it began to fall. Data from LRD’s Payline database confirms the need for caution rather than optimism: pay freezes are still with us; there are fewer long-term deals ahead; and we can expect a more determined attack on public sector pay, all adding to the risk of a “double-dip” recession. Yet the current pay round has also shown the resilience of the collective bargaining system, with pay growth continuing in many quarters and the survival of a broad negotiating agenda.

The rapid slide into recession

The decline in business confidence began in 2007, but economic contraction didn’t take hold until the second half of 2008, and the first half of the pay round to December 2008 reflected “business as usual”. The record high in redundancies in the fourth quarter of 2008 came only two quarters after a record low and the first two quarters of recession only reversed the employment growth of the first half of 2008. Nevertheless, the third and fourth quarters of 2008 experienced a rapid pace of change, with vacancy levels falling, output per worker declining, a rising claimant count and increasing redundancies.

There was a record increase in the number of claimants on Jobseekers’ Allowance (JSA) for short periods. Evidence of a decline in number of hours worked began to stack up, as employers cut back and took extended breaks and unemployment rose by 43% to almost 2.5 million by May-July 2009.

The biggest fall in jobs came in the finance and business services sector (redundancies rising from 26,000 in January-March 2008 to 74,000 in April-June 2009) but construction has been hard hit as has manufacturing (output suffered its most severe fall for 30 years). A new report (Recession Britain, ESRC) argues that low-educated, low-skilled workers have suffered most in terms of their employment prospects. Communities in the West Midlands and North East were hit early, while other areas, particularly London, felt the full effects later. It is clear, too, that the jobs cull is not yet over. Recent surveys (by the CIPD and UNISON) point to growing job fears in the public sector.

Return of the pay freeze

Wage freezes have been among the most visible results of the crisis in bargaining terms in 2009 as negotiators struggled to adapt to recession and plummeting RPI inflation. Metal manufacturer Corus took this route as it explored agreed steps to stave off job losses. Other big-name examples include Xerox, Manchester Evening News and Boots Manufacturing. After lengthy negotiations, BT offered non-consolidated payments totalling £400 to all CWU-represented employees, but management pay was frozen and grades remained unchanged.

Some freezes have accompanied other recession-related measures, such as short-time working and lay-offs. Crane Process Flow Technologies (a valve and tap manufacturer) shut down for a week in April following an earlier pay freeze and redundancies. At agricultural machinery manufacturer Ransomes Jacobsen, employees agreed to take two weeks unpaid leave in an attempt to stave off redundancies.

Where things have been toughest, unions took the initiative, as with the Honda pay cuts and job guarantee package, following a four-month shut down (see Workplace Report, June 2009, p. 3). At Cumberland Newspapers, NUJ chapels agreed to defer the January 2009 pay increase. However, unions have not been prepared to give employers a blank cheque and in some cases attempts to impose a pay freeze have provoked industrial action or the threat of it. In August, Unite members at Fujitsu voted overwhelmingly for industrial action against closure of the company’s main final salary pension scheme and a pay freeze. Manchester First Bus suffered a succession of strikes over a zero per cent pay offer. The Southern Vectis bus company on the Isle of Wight has also been affected.

No pay “wipe out”

Although freezes have grabbed the headlines, there has been no “wipe out” on pay so far. Earnings growth in the Average Earnings Index has slowed rather than collapsed, dropping from over 3% at the start of 2009 to its latest whole-economy rate of 1.8% (excluding bonus payments). The slowdown has been more pronounced in manufacturing than in private services or the public sector.

Evidence from LRD’s Payline database confirms continuing overall pay growth although at a slowed rate as the pay round progressed. The median (mid-point) settlement for the 2008-09 pay round as a whole was 2.65% or 2.4% weighted by the number of workers covered by different agreements. This is lower than previous estimates from LRD and reflects the addition of lately-received settlement data. The inter-quartile range was 1.32% to 3.8% (1.25% to 2.65% weighted). These figures are based on the increase on the lowest basic rate in 695 agreements out of a total of 774 (754 with known pay settlements) effective between 1 August 2008 and 31 July 2009.

At first glance it’s hard to square these statistics with evidence of widespread pay freezes. But behind the median there has been a line of divide between bargaining groups forced to accept freezes and those still able to secure a “normal” pay rise: 18% of pay settlements resulted in a pay freeze or cut (Payline recorded very few contractual pay cuts like the 5% pay cut at Rotherham Advertiser in July) while a further 10.9% were low-level settlements worth less than 2%, together accounting for almost three out of ten agreements. The proportion of workers covered by pay freezes and cuts was only 4.1% but together with sub-2% rises almost a third (32.6%) were in that camp (see box).

However, freezes and low-level settlements have been balanced by higher settlements. A quarter (25.9%) delivered rises of between 3% and 4%, while a further fifth (19.9%) gave rises of 2% and up to 2.99%. Even in this recessionary pay round, more than one in six agreements (17.8%) gave rises of more than 4%. The data take account of a further 7.4% of agreements that delivered a known increase (such as an agreed paybill increase) rather than a freeze or cut, but where we have no figure for the effect on the lowest basic. Among agreements that provided any kind of increase on the lowest basic rate the median was 3%.

Timing

These conflicting trends are partly explained by timing, with clear differences between the first five months of the pay round (August to December 2008) and what followed. Initially there were few pay freezes, and settlements ranged mainly around values of 3% to 4% (the mid-point was 3.8% for these months). Everything changed in the first three months of 2009 (January to March). A fifth of settlements (20.7%) were now freezes (or cuts): even so, almost three out of 10 (28.5%) of deals were still in the 3% to 4% range (the mid-point was 2.9%).

April, when just over a quarter of all settlements in the survey were due, was the bleakest month. Pay freezes and cuts (27.2%) and sub-2% rises (19.8%) dominated the bargaining headlines. Payline recorded a single-month median of just 1.7%, zero if long-term deals were excluded.

The final three months of the 2008-09 pay round (May, June, July) looked more like April than the previous periods: pay freezes accounted for 23.3% of settlements, sub-2% rises a further 15.0%. However, there was more activity in the 2% to 3% range (42.6% of settlements) and the median lifted a little to 2.0%.

Long-term pay bargaining

The stability provided by long-term pay deals has undoubtedly helped sustain a higher level of pay growth than we would otherwise have seen (see table). A reduced number of such deals going into the new pay round could have implications for consumer spending power, and so for recovery from the recession.

Two thirds (66.4%) of settlements in the 2008-09 pay round were short-term pay deals, a slightly higher proportion than last year. These were mainly plain one-year agreements (59.2%), or short-term staged deals running for 20 months or less. Together they had a median of 2.0%, but also a line of divide between freezes (26.1%) and sub-2% rises (11.3%) on one hand and a “peak” of positive rises between 3% and 4% (23.2%) on the other.

A third of settlements (33.6%) were long-term, fewer than the 38% recorded in the 2007-08 pay round. The number of new long-term deals among these (7.4% of all settlements, 21.9% of all long-term deals) was down on the number recorded in the 2007-2008 pay round (10% of all settlements, 27% of all long-term deals). The median among new long-term deals was 3.0%, a third of them worth more than 2% but less than 3%.The new three-year agreement at Eggborough Power Station was one example, providing a 3.66% pay rise in January (based on an RPI 12-month average).

Existing long-term deals accounted for 26.2% of all settlements. Most had no inflation link (14.2% of all agreements) but a large minority were inflation-linked (12.0% of all agreements). Existing deals without an inflation link had a median value of 3.5% and almost no pay freezes or sub-2% rises. Over a third (37.6%) were worth between 3% and 4% while one in six were worth more than 5%. Network Rail (signallers, operational and clerical grade agreements) raised pay by 3.5% in January 2009 under the second stage of a two-year deal.

Inflation-linked long term deals were affected first by high RPI inflation in the final months of 2008 (4.8% in August, 5.0% in September, 4.2% in October, 3% in November) and then the zero to negative RPI in 2009. The resulting spread of pay rises lacked any central trend, a 3.5% median obscuring the divide between low-end settlements (21.5% freezes and sub-2% awards, chiefly the latter) and four out of 10 settlements worth more than 4%. Heathrow Express had a 6% rise based on the July 2008 RPI of 5% plus 1% whereas Johnson Matthey had a June pay freeze based on the April 2009 RPI of -1.2% plus 0.15% (Kelloggs in Wrexham had a pay freeze this way too).

Long-term deals have lifted the overall settlement level for 2008-09 where they have been honoured. Jaguar Land Rover awarded 5.5% under its existing agreement last November but will freeze pay in 2010 in return for guarantee of no compulsory redundancies (Workplace Report, March 2009, p. 17) and workers at Howmet Castings had their 3% rise in April. But the failure to honour long-term rises has led to disputes at Cadbury and Visteon. ITV did not honour its existing deal but offered rises ranging from 2.1% to the October RPI rate of 4.2%, depending on salary level (those under £25,000 getting the biggest rise).

Just a fifth of existing long-term agreements have another stage to run in 2009-10. Coupled with new long-term agreements, 113 of the 774 agreements in this year’s survey (14.6%) should produce a pay rise in 2009-10. That is a considerably smaller proportion than the 26.2% achieving a rise under an existing agreement in 2008-09. This partial retreat from long-term deals could fuel a more subdued settlement level in 2009-10 if bargaining conditions remain tough.

What happens now?

While economic recovery is predicted, growth in 2010 may be stunted by a lack of demand: Richard Lambert, CBI director general, warns that conditions in the UK will remain tough for some time yet, making it difficult to see where demand growth will come from. There will be a short-term boost as firms rebuild stocks and consumers get spending in before VAT rises (due to happen on 1 January) but growth next year “will remain very weak, while job losses will continue and household consumption will stay tightly squeezed”.

At least four potential questions overshadow the chances of continuing pay growth: what will happen with pay freezes and deferred rises left over from the 2008-09 pay round; what about settlements that have already been implemented in the first three months of the 2009-10 pay round (August, September and October); what sort of pay rises lie ahead under existing long-term and other known deals; and what will happen with public sector pay, given next year’s expected general election?

The pay freeze legacy

The level of settlements from the 2008-09 pay round would be higher if earlier pay freezes were relaxed. Some were always intended to last for the full year (Eaton Electric) or longer (James Walker & Co) but others were due to be reviewed. A pay freeze at Rhodia Consumer Specialities (Oldbury) was replaced by a 1% rise from May, while the deferral of a staged rise due at Ciba Specialty Chemicals was reversed in August (backdated to April). But the Express Newspapers pay increase due on the 1 January 2009 was deferred until the 1 June 2009 and subsequent attempts to negotiate a pay increase failed.

New pay-round so far

The settlement level going into the 2009-10 pay round could be significant for general economic buoyancy as the economy comes out of recession, particularly in view of uncertainty about whether this will be a strong recovery, a weak recovery or even a “double dip” recession. Results are in already for 49 agreements effective in August, September or October and have a 2.4% median increase on lowest basic rates.

Some of these are in sectors affected most by the National Minimum Wage, which has just risen by 2.1% (1.1% to 1.3% for younger age-groups). The TUC points out that nearly one million workers benefit from this, two-thirds of them women.

Already there are some 2009-10 pay freezes: at Billingtons Construction; at TSL Education (where the new three-year has been hit by negative RPI inflation); and at Vauxhall Motors. A freeze was on the cards at the Vehicle and Operator Services Agency although a formal offer had not yet been made as Workplace Report went to press. Other low-end deals include 1.18% at Booker; 1.22% on the Agricultural Wages Board grade 1 rate (2.2% on other grades); 1.42% at Argos (7 pence per hour on all grades); and 2% at Morrisons (with additional skill money) and Poundland.

School teachers in England and Wales have just started a new 24-month agreement with a rise of 2.3% on salaries (4% on point M1 of the main scale). There was a 3% rise at Guildford College and increases worth 3.25% and 3.66% at BBC and BBC Resources (respectively). A 4% increase applied at Arriva The Shires including Harlow, ex-Sovereign and easyBus.

Other new pay round settlements (including six police settlements worth between 2.5% and 2.6%) were governed by existing long-term deals: 1.8% at the British Library, 2% at the Insolvency Service, Ordnance Survey and Scottish Executive; 3.5% at British Bakeries (Glasgow); 4.67% at First Truronian; 6.42% at the Ministry of Justice (following imposition of a regional pay structure); 7.65% at the Crown Office and Procurator General; and 9% at Arriva Derby. Probation staff received a minimum of £900 under the final stage of their agreement, while employees at the Government Car and Despatch Agency progressed by one step (with a 2% underpin).

In the pipeline

What happens as the pay round progresses is more difficult to predict, although we already know there are likely to be fewer rises under existing long-term deals. Some 2009-10 rises will be wholly inflation-dependent (Svitzer Marine, Virgin Trains drivers); but where a specific value has already been agreed the figures suggest a median of around 2.5%. However, it will include pay freezes, as at Jaguar Land Rover and in the plumbing (England and Wales) agreement, described by Unite as a “pragmatic approach for the well being of the plumbing contracting industry”.

The public sector as a whole

It is often said that public sector pay settlements fall behind the private sector in times of growth and catch up in times of recession, and that seems to be borne out in official earnings statistics and in previous data from the LRD Payline database (Workplace Report, October 2008). In this pay round, employers in the largest local government bargaining group eventually offered a rise of 1.25% (with an extra day’s leave for a quarter of the workforce) after initially offering just 0.5%. Local authority chief officers in England and Wales have had a pay freeze, while pay rises in the Prison Service have been applied to pay maxima but not minima. But in the public sector there has not been anything like the level of pay freezes seen in the private sector to date.

In the Average Earnings Index (excluding bonus), annual public sector earnings growth ranged between 3.0% and 4.1% during the 2008-09 pay round, averaging 3.4% in the three months to August. Corresponding numbers for the private sector were 1.4% to 3.7%, averaging 1.5% in the latest three months. The manufacturing range was 0.7% to 2.5% (1.5% in the last three months), while in private sector services it was 1.5% to 4.0% (1.7% in the last three months).

However, the headline averages can be misleading and Payline data suggests no real gap at the median level (2.65% for the public sector, 2.6% for the private sector. The inter-quartile range is wider in the private sector (0.88% to 3.9%) than the public sector (2% to 3.5%) which means there have been more lower and higher settlements in private sector firms. On weighted numbers the private sector (median 2.8%, inter-quartile range 1.5%–3.9%) was ahead of the public sector (median 2.4%, range 1.25% –2.5%) reflecting the influence of big private sector national agreements (for example in construction).

The 10 largest agreements were all positive in value but, with the exception of higher education (5%) and HM Revenue and Customs (4%), all worth less than 3% on the lowest basic rate. In addition to local government these included the NHS Agenda for Change agreement (2.4%), school teachers in England and Wales (2.45%), local authorities Scotland (2.5%), NHS doctors and dentists (1.5%), the armed forces (2.8%) and the police (2.6%). This has not stopped some politicians calling for a freeze.

Industrial sectors

The preponderance of pay rises over pay freezes is reflected in headline settlement figures for most industrial sectors, with construction topping the list despite the difficulties and job losses that have affected the sector (see box).

The broader bargaining agenda

The recession has not stopped negotiators tackling a wide range of issues including the “fairness” agenda, work-life balance and family friendly issues, bonuses and performance pay, allowances and working time. Merseyrail had a second-year flat rate increase of £800 on all rates (worth up to 5.56%) in April but there were other elements in the package too: the overtime divisor for carriage cleaners reduced from 39 to 36 hours; the fully paid element of maternity leave increased to 26 weeks with a further 26 weeks paid at SMP; and there was agreement to support the principle of universal travel facilities.

Some employers have clearly been willing to negotiate too. A 3.4% deal was secured at BAe Systems (Brough) through agreement on participation and involvement in “safety kaizens”. Manual workers at BVT Surface Fleet (Clyde) had a 3% April pay rise which included 1% for productivity and efficiency measures. Siemens Power Generation had a 3.5% increase in January but 70% of employees received an additional 4% increase against progression in the skills matrix. Sainsbury’s introduced a new skills payment of 16 pence per hour for certain staff.

However, threats have often outweighed improvements and the bargaining round has also seen serious attacks on terms and conditions such as sick pay (Nottingham Express Transit), redundancy arrangements (the current civil service compensation scheme cuts, see Workplace Report, September 2009, p. 5) and especially pension entitlement, where examples (including Royal Bank of Scotland) are too numerous to mention.

Fairness

Unions have not abandoned their traditional fairness agenda. Measures include:

• Shorter scales to improve equality: HM Revenue and Customs has been reducing pay band ranges since 2005, taking further steps in that direction this year and next. Minima have been removed from all Forestry Commission pay bands, reducing progression times to three or five years.

• Minimum salary levels: Journalists at the Morning Star won their claim for a £19,000 a year minimum wage. Under the G4S Cash Services (UK) Ltd (clerical & administrative) agreement a substantial increase in the minimum for the lowest paid employees was agreed, with a minimum benchmark salary of £17,500 for senior cashiers on the 40-hour contract.

• Bigger increases for lower grades: Workers in the Meat Hygiene Service secured an overall pay rise of 2.99% (backdated to 1 August 2008) giving rises of 5%, 3% or 2%, with staff at the bottom of the scale receiving the highest increase. At Alstom Transport West Coast Traincare the April pay deal was 2.5%, 2.65% for staff short of the £21,000 basic pay threshold. • Underpinning rise: At Bombardier Derby (A, B & C grades) the formula was 2.2% or £500, whichever is the greater; at Arriva Trains Wales 3% or £800; at Hyde Housing Association 1.5% or £300; and at the Museums, Libraries and Archives Council (MLA), 3.5% underpinned at £1,200. • Flat rate: At Caparo Merchant Bar a general increase of 2.3% of the salary bill was paid as a flat amount of £457. BT did not increase grade rates but did agree to award lump sums totalling £400 to CWU-represented grades.

The family friendly agenda

A number of employers have made improvements in paid paternity leave (for example Magnox Electric – from six days at full pay to up to 74 hours at full pay for a two-week leave period/37 hours for a one-week leave period); and maternity/adoption pay (increased to 26 weeks full pay at Babcock Marine Devonport). Sixteen hours of compassionate leave a year were introduced at Nairns Oatcakes while bereavement leave increased from three to five days at Stagecoach Fife.

Bonus and performance pay

Bonus and performance pay issues featured in over one in 10 settlements, although this was not always positive where it opened the door to low pay rises for large numbers of staff, or left employees vulnerable to losses of bonus payments (ranging from £460 to £500 at Springfield Fuels, to almost 10% at Aegon). The Forestry Commission dropped performance bonuses at its October 2008 pay review but retained the right to reintroduce them in the future. At Random House, pay rises of 4% (3% above £40,000) were awarded in January without merit payments. Capita Life and Pensions (Pearl Contract) had a 1.5% “PRP-lite” pot, whereby 95% of staff expected to get 1.3%, plus increases on the lowest pay grade starting salary to £12,500. At Amec Nuclear, any performance-related increase outside the 3.5%-7% range is subject to “felt-fair” ratification by the recognised trade unions.

Allowances and benefits

Negotiators have tackled allowances and benefits too. These range from private medical insurance (Facility Management) to attendance bonuses (Control Techniques, Armstrong, Stagecoach Coastline Buses), first aid payments (up by £5 at Nairns Oatcakes), responsibility allowances (Heating and Ventilating) and medical leave (Heatrae Sadia). Ethel Austin Stores introduced a 50% discount for uniform purchases; uniforms are now provided free (excluding shoes) under the Next Distribution (SATA) agreement.

Working time

The pay round has seen some positive hours cuts (as distinct from lay-offs). Last September’s drivers’ pay deal at Heathrow Express cut the working week to 37 hours. RPMI (Darlington), which awarded a 3% increase on all band medians from April, also agreed to set up a working party looking at potential for a 35-hour week. Cobham Aviation Services agreed a four-day 37-hour a week as part of a one-year deal.

There has been more positive bargaining on annual leave. London Overground (April, 10% to 27%) increased annual leave entitlement to 33 days. The Serco Docklands agreement (3.8%, January) included a one-day increase to annual leave bringing the total to 30 days while Stagecoach Hampshire also increased leave provision. TDG Logistics (Devon) (3%, June) awarded an additional three days’ annual leave after five years of service, while Newcastle Building Society sweetened its pay freeze with one extra day’s holiday, for this year only.

The Northlink Ferries agreement (5%, October 2008) provided for an extra two weeks annual leave to be rostered for the year commencing 1 January 2010 subject to, but not restricted to, a revision of employment terms and conditions and working practices. Phoenix Healthcare agreed a one-day increase in holiday allowance along with its 3.65% February pay rise while the 4% January settlement at Bombardier Derby allowed for an additional day’s leave out of the annual entitlement to be broken down into two-hour blocks.

Conclusion

Unions have been understandably preoccupied with job security during the 2008-09 pay round and have accepted pay freezes, reduced hours and extended shutdowns where necessary to keep members in work. But where employers could afford pay rises, they have in most cases been willing to negotiate these, despite negative RPI inflation.

Nevertheless the overall settlement level would have been lower had it not been for the presence of so many long-term deals negotiated before the recession set in. These will be scarcer in 2009-10. Coupled with increasing political momentum for pay freezes in the public sector, particularly following the forthcoming general election, the new pay round may well see pay settlement levels remaining subdued and unpredictable at a time when uncertain demand continues to threaten economic recovery.