Pay bargaining agenda 2012: manufacturing and production

Author: Adam Geldman

Wage bargaining in the manufacturing sector will start again in earnest in January 2012. We talk to those at the heart of the bargaining process about what employers and employees can expect.

Key points

Manufacturing trade unions and employers are gearing up for the coming pay round - formulating claims and preparing offers against a background of continued economic uncertainty. With most workers having experienced a real-terms pay cut in 2011 (when headline inflation outstripped the vast majority of wage settlements), many are keen to maintain their living standards, while mindful of possible job losses. For their part, firms are casting a wary eye over their order books, concerned about sluggish demand, if not a double-dip recession.

In this overview of the hopes and fears for the 2011/12 bargaining round, XpertHR has sought the views of key figures in manufacturing, on both sides of the negotiating table, with responsibility for pay-setting. We consider the likely course of events over the next 12 months in:

• chemicals and pharmaceuticals;
• construction;
• energy;
• engineering and metals;
• food, drink and tobacco;
• general manufacturing;
• paper and printing; and
• water.

An accompanying article considers similar issues in private sector services.

XpertHR has also recently examined the pattern of pay awards over the past year and looked at each sector of the economy in turn.

Chemicals and pharmaceuticals: no sign of pay explosion

In the opinion of the GMB union, the state of the economy will have a major bearing on the contours of pay bargaining in 2012, much as it did in 2011. This is particularly true of heavy chemicals, as these are often sold to firms that use them to manufacture industrial and household products. Many pharmaceuticals, on the other hand, are used to produce drugs and other medicines. Here, the state of the economy may not be such an important factor in determining demand, although discretionary spending on goods such as cosmetics may fall if the economic outlook remains uncertain, the union says.

The GMB predicts that it may struggle to achieve settlements in 2011/12 that at least match those achieved this year, when it says that deals averaged around 3%. Despite the fact that many members have experienced a cut in living standards as a result of below-inflation pay rises, there is little sign of an imminent and sustained upsurge in wage militancy, the union says.

Nor is there any concrete evidence that employers are looking to bargain on pay using the consumer prices index (CPI), rather than headline inflation, although the GMB notes, somewhat wryly, that in 2010/11 it found it difficult to secure deals that matched even the Government's preferred inflation measure, let alone the generally higher all-items retail prices index (RPI). Any move by employers to switch from RPI to CPI would be highly significant in determining the annual uprating of pensions, the union says, and it has noticed that some firms have been pushing to use the latter yardstick, rather than the former.

Construction: outlook is "very grim"

Looking to 2012, the Federation of Master Builders (FMB), which represents more than 10,000 mostly small and medium-sized firms, says that the sector's economic outlook is "very grim", with no improvement likely in the foreseeable future. The possibility of a double-dip recession is of particular concern to the industry, the FMB says, and it has grave doubts that the private sector will be able to soak up public sector job losses, as the Government hopes. Inevitably, this will hit member firms, it argues, as domestic customers batten down the hatches. According to the FMB, this, combined with the rising cost of raw materials and the January 2011 increase in VAT, is bound to take its toll on the industry.

Reductions in public expenditure will add to the industry's woes in the coming year, the FMB says. Procurement by central and local government accounts for about 40% of all construction work, and although its members tend not to pitch for major contracts they are involved in smaller-scale building and maintenance projects that are being hit by spending cuts. Further, there are the indirect consequences of public sector job losses to take into account as unemployed householders are less likely to renovate or improve their properties.

This will inevitably affect the next wage round, the FMB says. It comments: "The union, understandably, will say its members are being hammered by rising inflation. While we may have sympathy with this argument, everyone's standard of living has taken a hit: customers; our members; and their employees. Unfortunately, the market in its current state simply cannot support a 5% pay increase. I think the forthcoming negotiations might be a long slog for both sides."

Thus, only a modest increase is on the cards, and it is likely that, as in 2011, inflation will continue to outstrip wage growth in the construction industry.

Energy: deals to range between 3% and 4.5%

Utilities in the UK consists of two main constituents: energy and water. Steve Bloomfield, one of Unison's national officers responsible for these key industries, talked to XpertHR about the 2011/12 bargaining round.

In his view, the reward package within energy is well established, with what the union regards as progressive agreements covering, for example, holiday entitlement and maternity provision. This means that in 2012 its workplace representatives will primarily focus on securing wage settlements that at least match inflation, rather than improving non-pay terms and conditions.

Unison says that, in recent years, jobs have come under threat as a result of reorganisations and a continual drive to cut costs. The union will be looking to maintain employment in the face of these challenges. On the plus side, Bloomfield welcomes the expansion of "green energy" and anticipates that it will boost employment over the next five years, as will the roll-out of "smart" meters. However, the union says that it is questionable whether or not these jobs will be maintained in the longer term.

Bloomfield sees no reason why wage deals in the energy sector next year might vary markedly from those in 2011, with awards likely to be pitched between 3% and 4.5%. While its members want deals that at least match headline inflation (still the benchmark used by unions to judge the relative worth of a pay offer), Bloomfield says that energy companies tend to concentrate on movements in market rates for key staff such as technical and engineering employees. While the union is prepared to drive a "hard bargain" on pay, it does not anticipate an outbreak of industrial action in support of claims - hardly surprising in the current financial climate, Bloomfield says.

Engineering and metals: settlement levels may rise

XpertHR canvassed the views of the EEF, the body representing more than 6,000 UK manufacturers, which employ around 900,000 workers between them. Lee Hopley, the EEF's chief economist, says that continued economic uncertainty is likely to remain a key factor in pay-setting over the next 12 months. Despite this, Hopley expects deals in engineering and metals to actually drift upwards to their pre-recession level of 3%. As skill shortages are likely to persist, at least in the short term, companies may need to raise wages beyond this to recruit and retain key workers, she adds.

At the time of writing, the EEF predicts that RPI and CPI will come in at 3.3% and 2.5% respectively in 2012. In the EEF's view, the traditionally close link between settlements and inflation was severed during the recession, and it is far from certain that it will be restored in the near future. Despite this, if settlement levels normalise as it expects, the average pay deal is likely to be closer to RPI than CPI over the coming pay round, Hopley says.

Food, drink and tobacco: awards to lag behind inflation

According to the Food and Drink Federation (FDF), which represents the sector's manufacturers, the industry is facing upward cost pressures, mostly from high agricultural commodity prices. It says that with headline inflation at or around 5% it has not been possible for settlements to match this, with average awards pitched between 2% and 3% over the last year.

The FDF thinks that many of its members are "exhibiting cautionary behaviour" and so are likely to hold wage increases below inflation over the next wage round - with deals likely to bunch between 2% and 2.5%. On a more optimistic note, the FDF does not think that pay freezes will be widespread.

General manufacturing: conditions remain difficult

There appears to be little respite for many manufacturers, particularly those whose products are sold on the UK's high streets, rather than exported. A leading employers' organisation, which undertakes national pay bargaining on behalf of its member firms, says depressed activity has been blighting the industry for some time, and this is likely to continue into 2012. Indeed, the organisation's optimism survey, which tracks employers' sentiments, shows that companies are now more pessimistic about the coming year than they were in both October 2010 and February 2011.

Demand is usually seasonal, with production levels tending to be flat in the summer, picking up in the autumn and towards Christmas. However, in recent times, there has been a less clear-cut pattern, leading to uncertainty among many firms. Given the current state of the economy, it appears likely that employers will take a cautious approach to both pay-setting and recruitment over the next 12 months. The national pay agreement is highly unlikely to match RPI inflation, the employers say. Further, it is probable that short-time working will feature prominently in an effort to preserve jobs.

Paper and printing: hard times continue

According to Steve Sibbald, Unite's national officer for the union's graphical, paper and media section, the key determinant of bargaining outcomes in commercial print will be the state of the industry: "It's been no secret that there has been excess capacity in recent years, and many companies have folded. There are signs that this cull is ending, and those firms that have weathered the storm will probably raise prices. However, even if they impose significant increases on customers, they will only be catching up as they have had to endure zero price rises and, in some cases, cuts, over the past five years or so."

If this does prove to be the case, the union says that it will be looking to take advantage of any upturn: "As long as we keep our collective strength, we will push for higher pay awards - there is no doubt about that. In fact, where profitability has increased, we have secured above-trend deals." Indeed, there has been a sharp decline in the proportion of pay freezes across the sector generally over the past 12 months, pushing the median award up to 2%.

Unite maintains that, because of economic uncertainty surrounding the industry, employees are more likely to join the union as a bulwark against job losses and any further erosion of their terms and conditions. Sibbald says that overall density levels are increasing in organisations where it has recognition. However, the union acknowledges that it has lost a significant number of members in recent years due to company closures.

In the debate over whether RPI or CPI is the yardstick that should used by pay-setters, Unite comes down firmly in favour of the RPI, with one caveat: "As negotiators, we will continue to look to the RPI until it falls below CPI, at which time we will bargain on the Government's preferred measure. If the situation reverses, we will use the RPI as a benchmark." When asked whether or not it would be difficult for the union to regularly "change inflation horses", the answer was an unequivocal "yes", although Sibbald points out, by way of justification, exactly the same tack is used by employers.

Unite says that it will always seek deals that at least match the prevailing rate of inflation, however defined, although it acknowledges that this has not always been possible in recent times due to the parlous state of the economy. It predicts that the average settlement over the next 12 months will come in at about 3%, roughly the same as last year: "Only after 12 months of stability through 2012 will members have the confidence to take the necessary steps to secure real-terms increases in their standard of living."

For now, there appears to be little appetite among Unite members for widespread industrial action over pay. Sibbald says that, as a result of improvements in information and consultation processes, employees are better informed and so understand the economics of the industry. In such circumstances, job security is likely to take precedence over improvements to terms and conditions.

In recent years, multi-firm pay negotiations in commercial print between the union and the employers' body, the British Printing Industries Federation, have been in abeyance, although the substantive national agreement remains in force. Therefore, the union has sought to negotiate local, company-level deals based on RPI inflation. For the 2011 pay round, the benchmark wage claim was pitched at 5.1%.

The union is hopeful that national pay negotiations will take place on the April 2012 deal and there are some "dates in the diary" for talks.

Water: pensions high on the agenda

Steve Bloomfield is one of Unison's national officers responsible for the water industry. Over the coming year, Unison will be prioritising pensions as it has detected an interest among some employers in closing final-salary schemes to new employees, as well as taking other steps to erode retirement provision.

In common with other unions, Unison is determined to stick with headline RPI - now and in the foreseeable future - when negotiating on pay but it admits that this strategy has not always been successful, with employers increasingly looking to CPI.

In the absence of national bargaining arrangements, the union negotiates locally, company by company. While it has considered submitting a single model claim for the whole industry, it says that its lay officials tend to identify with their particular employer and so are against a common claim. Further, even though job functions may be similar in water companies, the pay and grading systems are often different, making it difficult for the union's branches to arrive at a common position.