Could skills shortages push up manufacturing pay?

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Having been out of the office for a couple of weeks, I've spent yesterday afternoon catching up on last week's economic data when the vacancy figures (which Felicity flagged up last week) got me thinking.

Manufacturing vacancy rates (i.e. openings per 100 employee jobs) have been on the rise over the past year, up from just 1.1% in April 2010 to 1.7% this April. Rising vacancy rates area good and worrying signal for the health of the industry.

Firms tend to recruit only when output and orders are expanding and they're are, at minimum, modestly confident about the next few months. This is why manufactuirng added a net 14,000 jobs in the fourth quarter of 2010.

But if rising vacancy rates reflect skill shortages, that could help push up wages. For example, in the rush of the downturn, vacancies plummetted as firms were focused on holding on to skilled workers. This helped push wage growth down, as employees were took pay cuts, in large part to keep their own jobs, but also because there weren't jobs elsewhere.

Now coming out of the recession, we see that vacancies and wage growth are again, moving in tandem (except this time around it looks like wage growth is slightly ahead of vacancies). This could be because firms are setting wages for the year ahead, and are factoring their recruitment plans. It also reflects that firms are rewarding staff that stuck through short-time working and pay cuts.

But the rapid rise in the vacancy rate, coupled with anecdotal evidence of skill shortages, suggests that vacancies could be yet another factor that could lead to higher wage growth.

Moving in tandem?3-month average pay settlement (% annual increase) and manufacturing vacancy rate (vacancies per 100 employees)Source: EEF & JAM Recruitment Pay Bulletin and ONS

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