How are Employers Responding to a Tight Labour Market?
7 January 2025
What does a tight labour market mean for employers? Using data from a recent REBA report, we’ll explore what a tight labour market means for employers and employees. Considering the pending minimum wage and NIC increases, the standard response to a tight labour market - wage increases – may not be viable for all businesses. Is an even stronger EVP the answer? Read on for more.
What Does a Tight Labour Market Mean?
Talent shortage, skills gaps, and now a tight labour market... The HR landscape is full of these emotive terms and challenges, but what does a tight labour market mean?
When the labour market is tight, unemployment rates are lower, job openings increase, talent wars peak, and wages become higher. In a tight labour market, jobs often go unfilled, and employers may have to offer more than anticipated to secure the talent their business needs.
Employees fuel businesses. They’re essential for growth, but with the wage bill already due to increase in April 2025, many companies can’t afford to enter a talent bidding war. The good news is that job seekers are weighing up the entire package on offer, including your employer brand, CSR credentials, and Employee Value Proposition (EVP) alongside the salary on offer.
Are We in a Tight Labour Market?
A tight labour market… when economic matters and HR strategy meet. A Bank of England report claims that the last three years have seen a relatively tight labour market, citing post-pandemic structural shifts and recruitment struggles. The Institute of Employment Studies (IES) agrees with the sentiment. However, the IES reports that it’s less ‘acute’ than in 2022.
Why is a Tight Labour Market Bad?
Economic experts agree that the UK is facing a tight labour market, but what are the implications? Is a tight labour market bad?
Minimum Wage and NIC Increases
We’ve mentioned above that a tight labour market can create a war for talent and skills, which often means offering a higher-than-anticipated salary. From April 2025, employers will pay higher wage bills, negatively impacting many industry sectors. Offering more money to get the best people isn’t an option for every employer. Some risk being ‘priced out’ of the competition.
Inflation
A tight labour market isn’t just a business issue. It impacts the entire economy. When the war for talent forces the employer wage bill up, they have to recoup the costs from somewhere. When business operating costs rise, the increase feeds through to the consumers, pushing up the cost of living. The result? A nationwide increase in wages to keep up with the rising inflation.
Reduced Economic Output
Businesses need the right skills, talents and people to progress and grow. When roles are left unfilled, it can reduce overall productivity, potentially lowering the country's economic output.
Can a Tight Labour Market be Good?
All we’ve explored so far suggests that a tight labour market is bad for our economy and employers. Is there a flip side?
Higher wages may be problematic for employers, but for an employee in the middle of a talent war, the ability to negotiate better employment terms and a higher salary is a bonus. Still, when we consider who ultimately pays the price, are there truly any winners?
How are Employers Responding to a Tight Labour Market?
It’s clear that when the skills are short and the talent is spoilt for choice, retaining employees must be the priority. High employee turnover presents a considerable risk, and businesses must assess whether they’re at risk of losing their talent.
Employee Value Proposition (EVP)
Your Employee Value Proposition can set you apart from other employers, but what is EVP?
Your EVP includes the salary and monetary benefits you offer alongside non-financial benefits, like culture and flexibility. EVP is your unique offering - what makes you stand out from the crowd in a busy recruitment market. Your EVP is also an essential part of your employee retention strategy.
Career Development
REBA’s Global Workforce Report lists the ways employers are reacting to the tight labour market, and a focus on career development sits at the top of the list for 65% of businesses.
Career development opportunities form part of your EVP. There may be money involved for external training and learning courses, but creating opportunities to progress is a cost-effective way to grow in a tight labour market. If securing new talent is too expensive, developing the skills of the people already in your business is a sustainable alternative.
The best part… Employees want you to present them with career development opportunities. In our blog, ‘Employee retention strategies… the trick to keeping your talent’, we share that 87% of millennials consider development and career progression opportunities a priority when joining a business.
A clear progression path keeps employees engaged and motivated, increasing their sense of loyalty to your business. That’s not the only reason for developing the people already in your business to fill the roles needed instead of hiring someone else. When you bring on a new employee, they go through an induction process - they may need to learn all about your business, products and ways of working. It takes time to get up to full speed.
When you promote instead of recruit, there may be a period of adjustment and training as your employee embeds themselves in their role, but it’ll be far less than when hiring someone new. Fresh ideas and thinking are always welcome, but the people who already live and breathe your values and vision can hit the ground running.
Employee Benefits
The CIPD has published their Labour Market Outlook for Autumn 2024. They estimate that the average UK pay increase for 2025 will be 3%, which is less than in previous years. NIC increases have made it so many employers cannot afford to get into bidding wars for talent.
The REBA report reflects the CIPD findings, which is why focusing on employee benefits is the second way most popular employers are responding to the tight labour market. With 62% of employers agreeing, it’s only 3% less than those prioritising career development.
Your employee benefits package is vital to your overall EVP because it can stretch salaries, especially if you’re offering an Employee Discounts Platform and cashback-earning opportunities like our Pluxee Card. When used daily to save and earn on essentials or high-end purchases, these financial benefits can create more of a positive impact than a 3% salary increase.
That’s how impactful employee benefits can be.
With the pending NIC and National Minimum Wage increases, some employers may struggle to offer higher wages at all. The cost of an inclusive and impactful employee benefits offering may also seem out of reach, but this isn’t the case. Our new ‘Budget-Busting Employee Benefits Strategy Guide’ explains how you can use salary sacrifice schemes to save your business money and fund a comprehensive benefits package. We share a detailed review of the NIC savings employers can make with our Green Car and Cycle to Work Salary Sacrifice schemes, combined with the salary deductions achievable with our Annual Leave Purchase Scheme.
Using the salary example in our guide, if just four employees took on a Green Car salary sacrifice scheme, you could make enough class-one employer NIC savings to fund our entire current benefits portfolio for over 200 employees.
Taking self-funding, cost-saving and cost-neutral employee benefits strategies to the next level… it’s the Pluxee Effect!
Pluxee UK… Supporting Employers During a Tight Labour Market and Beyond
You may also find the following blogs helpful when exploring how employee benefits can support employee financial wellbeing and how to streamline our solutions to stretch your budget further.
- Everything you need to know about employee benefits
- Salary Sacrifice and Your Business Cost-Savings Strategy
- Exploring the Best Employee Benefits: Our Pluxee Cashback Card
- Exploring the Best Employee Benefits: Our Employee Discount Platform
With NIC and Minimum Wage increases pending, cost-saving strategies are essential. Still, when we combine this with a tight labour market, we must think outside the box. Some cost-cutting strategies stifle growth. While saving money in the short term, the longer-term implications may be more challenging to recover from.
The bottom line is that you need talent to thrive, and the talent is looking for the best offer. Employees need more than a competitive salary; they’re looking for an EVP that gives them more of what matters most to them. Our Budget-Busting Benefits Strategy Guide levels the playing field, giving you a tangible strategy that will fuel sustainable growth.
We’re ready to walk you through it, so why not join us on the journey towards smart partnerships?
Sources: Bank of England, RIBA, CIPD.