Cautious firms keep pay rises below inflation

A survey of 666 companies by the CBI and recruiters Harvey Nash found that 16 per cent were still freezing pay, with just 3 per cent planning to give staff an above-inflation wage rise.

Most of those questioned said the UK's flexible labour market helped stem job losses, although many froze recruitment and pay to help cope with the economic downturn.

The research showed that a majority of firms believed staff understood the need to change working patterns to deal with the recession and showed a flexible attitude.

Just one in 20 firms had a freeze on recruitment, compared with more than a third six months ago.

John Cridland, the CBI's deputy director general, said: "Employers have come out the other side of the recession, having managed to keep many more people in jobs than had been expected. This has been largely down to the flexibility and goodwill of staff who quickly adapted to emergency measures, including pay and recruitment freezes. Good communication played a key role in helping employees understand the changes needed to safeguard jobs.

"Although there are some signs that job prospects are improving, a good number of businesses are still operating a pay freeze. Those that can afford it are planning modest or targeted pay rises. By contrast, earnings growth in the public sector is outstripping the private sector.

"So far the public sector has been cushioned from the impact of the recession, but it now faces a squeeze. Drawing on the experience of the private sector in engaging employees during the recession to deliver much-needed change could help the public sector minimise the pain of spending cuts."

Albert Ellis, chief executive of Harvey Nash, added: "We are seeing the first indications in the market that businesses are gearing up for a return to growth and this trend is most concentrated in the technology, financial services sectors and some areas of manufacturing. Although the recovery is fragile, there is a sense that the UK economy as a whole has turned a corner.

"Our experience across many countries, particularly in northern Europe, suggests that the UK is one of the first to reflect this upturn. The UK has one of Europe's most flexible labour markets and without doubt this will play a major part in the recovery.

"For the public sector the outlook is much less certain and we await the details of the Government's spending reduction plan."