Minding the skills gap in the West Midlands

Government figures released this month show that the unemployment rate is at the lowest level since 2005, well before the financial crisis. Regional figures, also from the Office of National Statistics (ONS), however, show that the West Midlands has one of the highest unemployment rates in the UK and one of the largest increases in the unemployment rate, compared to the previous quarter.

The same figures show that, within England, the West Midlands has the second highest proportion of workforce jobs in the production sector (which includes manufacturing, wholesale and retail).

Meanwhile, the CIPD has published its latest Labour Market Outlook, which reports that employment confidence has strengthened markedly in the manufacturing sector, with a significant increase in the numbers of employers reporting that they will be looking to grow their workforce in the first quarter of this year.

What does this mean for West Midlands employers?

As we said in our “What’s on the horizon for employment” report, 2017 will be the year of the “good, the bad and the unpredictable” and the outlook for the West Midlands labour market so far seems to be seeing this play out.

The good

The sharp fall in the value of the pound in the second half of last year was good news for UK manufacturers. Demand for UK-manufactured goods strengthened in the three months to February, with total order books improving further, according to the CBI’s latest Industrial Trends Survey.

This is driving the increase in employer confidence and a rise in the number of vacancies  over the course of 2016-17 to the highest level since records began.

The areas where there are the highest numbers of vacancies are in the wholesale, retail and manufacturing sectors, which are the most prevalent in the West Midlands.

The bad

While the number of people in work is at the highest level since the downturn, growth in productivity is, on average, lower. At the same time, the cost of employing people is going up.

Official figures show that the growth in earnings and other labour costs are outpacing productivity growth. Unit labour costs grew by 2.3% in 2016 to Quarter 3 2016, while productivity is estimated to have grown by only 0.4% overall. In manufacturing, productivity is estimated to have fallen by 0.2% on the previous quarter.

Factors such as the National Living Wage (NLW) are pushing up wages, not just in terms of the increases in the lowest rates of pay but also as employers seek to maintain differentials for supervisory and management employees. The proportion of employers reporting that the NLW would increase their wage bill “to a large extent” prior to its introduction was, perhaps unsurprisingly, highest in the manufacturing, wholesale and retail sectors that dominate the West Midlands labour market.

Another key employment implication for this year is the apprenticeship levy, which applies (from 6 April) to employers with a pay bill in excess of £3m. This levy, which is 0.5% of the employer’s pay bill, will be collected alongside tax and national insurance contributions.

The unpredictable

While we have yet to trigger Article 50 and an actual Brexit is still years away, we are already seeing some of the implications of last year’s vote to leave the EU. In “What’s on the horizon for employment”, we said that attracting and retaining the right people could be one of the implications for employers as we start to exit the EU, but ONS figures are already showing a decline in the numbers of EU workers coming to the UK. The CIPD reports that sectors in the UK that rely on EU labour are already facing “significant recruitment challenges”.

So, the outlook for the West Midlands for 2017 is a mixed bag. On the one hand, businesses are seeing growth in demands for their products, while on the other the costs of employing people are rising out of proportion to increases in productivity. In addition, employers needing to add to their workforce are finding it increasingly difficult to fill vacancies and are unable to rely on EU labour to fill the gaps.

But perhaps all is not lost. Many employers are looking to see how they can bridge the skills gap. Around a quarter of employers responding to the Labour Market Outlook say that they are currently investing more in skills of their existing workforce and around a fifth say that they will recruit more apprentices, (putting the apprenticeship levy to work?). In the West Midlands as well, the number of hours worked in the region has risen more than any other region other than the South East, perhaps to bridge the skills gap.

Other employers are looking at recruiting and retaining older workers and investing in equipment and technology to increase efficiency.

Overall, the year to come will have its challenges. But the underlying trends can give our region cause some (cautious?) optimism.

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