End of pay freeze threatens inflation: IoD survey coincides with figures showing better unit wage costs

THE FREEZE on wages has come to an end and pay awards could again threaten to put upward pressure on inflation, an Institute of Directors survey warned yesterday.

The survey, the first such poll by the institute, shows that an increasing number of companies are linking their pay rises to the rate of inflation and wage freezes and pay cuts are on the way out.

The poll coincided with official figures showing a slightly better trend in the level of wages and salaries per unit of manufacturing output, steady underlying average earnings and recent rises in productivity sustained. In the three months to May, unit wage costs rose by 1.7 per cent against the same three-month period a year earlier. This compares with 1.8 per cent in the three months to April and 2.1 per cent in the three months to March.

Productivity, or output per head, in manufacturing industry was unchanged at 2.9 per cent in the three months to May from the three-month period ending in April, or the highest rate this year.

But Kevin Gardiner, UK economist at Morgan Stanley, warned that the survey suggested the latest dip in unit wage costs may be temporary.

Employment Department figures also showed that overtime hours worked in manufacturing shrank in May. The number of overtime hours worked per week was 8.6, down from 9.06 in April and a recent peak of 10.66 in May 1992. The figures point to increased job growth rather than a slowing economy. Mr Gardiner added: 'Employers are taking on more full-time workers and not working their existing workforce so hard.'

The survey of company wage settlements disclosed that those directors planning to freeze pay levels fell to 11 per cent from the 19 per cent who said they froze wages last year. The IoD said no companies now plan to cut pay. Last year 3 per cent of directors reported that they reduced wages.

The number of company directors who say their firms will link pay increases to the annual inflation rate in the next 12 months has climbed to 43 per cent from the 38 per cent who did so last year. And 21 per cent of companies surveyed say they will award pay increases above the current rate of inflation - a headline rate of 2.6 per cent in June. Just 9 per cent of directors expected to settle pay increases below the inflation rate.

The survey shows that the biggest move back to inflation-linked pay awards will occur in the distribution industry. Some 59 per cent of distribution companies are planning inflation-based pay awards compared with 38 per cent last year. Manufacturing companies are next.

Peter Morgan, the IoD's director-general, said: 'Annual increases in line with the retail price index but which are not matched by increases in productivity will themselves force firms to increase prices, fuel inflation and reduce job opportunities.'

Although 60 per cent of directors think underlying inflation will remain inside the Government's 1-4 per cent target range, Mr Morgan stressed it was essential for pay deals to be linked to productivity and performance if firms were to stay competitive.

The number of business failures in the first half of 1994 is running one-third below the number of collapses recorded in the same 1993 period, KPMG Peat Marwick said yesterday.

Some 1,081 receiverships were recorded in the period, or 34 per cent fewer than in the comparable 1993 period. Business failures have dropped for the past 18 months.