The growth of the UK economy as a whole disguises declining performance in the manufacturing sector in 1998. Industries exposed to intense international competition, such as engineering, are now warning of developments reaching crisis point. With skills shortages limiting the ability of employers to address pay directly, most have focused on redundancies, work reorganisation and working time to enhance flexibility and productivity.
In spite of a long-term fall in the size of the industrial workforce, manufacturing remains a very important part of the UK economy which accounts for almost one in five of all employees. Recently, however, the continued relative strength of the UK currency has had deleterious effects on manufacturing output and employment. High interest rates relative to other EU countries have also had a negative impact on investment and therefore productivity and competitiveness. With the decline of important markets in South East Asia, falling demand in continental Europe and slower growth in domestic markets, conditions for manufacturing have not been as bleak for some time. In January 1999, the Office for National Statistics reported the longest decline in levels of factory output since late 1990.
Increasing job losses
The problems experienced by UK manufacturing firms, and engineering companies in particular, have been highlighted by a number of recent reports. In December 1998 the Chartered Institute of Purchasing Managers reported findings from its monthly survey of more than 300 manufacturing companies, showing that levels of output, orders and prices were the most depressed since the survey began in January 1992. As a result, more than one in five firms were said to be shedding staff. The Trades Union Congress expects unemployment to rise by at least 400,000 in 1999, mainly due to manufacturing job losses, and has budgeted for a 2% net fall in membership over the year as a result.
In January 1999, the Engineering Employers' Federation (EEF), which represents 5,000 companies employing more than 40% of all manufacturing workers, released the findings of its fourth quarterly Business Trends Survey of 1998. It reported sharp falls in output volume, capacity utilisation and employment. Research by the EEF West Midlands region had already indicated a month earlier that seven in 10 firms had experienced declining orders over the previous quarter, more than a third had cut back on investment and almost half were laying off staff. The EEF expects these trends to continue throughout 1999, and has forecast 170,000 engineering job losses by the end of the year.
Implications for pay
In spite of the increasing seriousness of the manufacturing recession, there have been few signs so far of any pay "freezes" or cuts, with the important exception of the "survival package" accepted by the Rover workforce in December 1998 (UK9812168N). The EEF survey reported that pay settlements in the second half of 1998 averaged at about 3%, reflecting the retail prices index (RPI), although a number of companies such as the car manufacturers Ford and Jaguar agreed significantly higher awards, at 4.25% and 4.75% respectively. This stability in manufacturing settlements, albeit with a lagging behind the growth in service sector pay, was also supported by the pay data released in December 1998 by the Confederation of British Industry (CBI).
Nevertheless, the CBI survey also indicated that falling profits, inability to pass on pay increases through rising prices, and the falling level of the RPI were increasingly constraining manufacturing pay. Provisional results from the Industrial Relations Services (IRS) pay databank also indicated that the early evidence on 1999 showed mounting pressures on employers to achieve low cost awards. IRS reported that, confronted with the prospect of redundancies, trade union negotiators were for their part beginning to place a higher priority on job security than on wage rises. Lower pay settlements, possibly including longer-term agreements which exchange cuts in working time for a freeze in pay, therefore appear to be likely in the coming pay round.
Implications for work organisation and working time
Nevertheless, the EEF data also show that levels of engineering earnings have grown at a faster pace than pay. This might reflect increased overtime working and bonus es as tight deadlines, ever-demanding customer pressures and understaffing following "downsizing" lead to increasing work pressures and longer hours. At the same time, employers in specialist sectors such as aerospace and semiconductors might be concerned to retain skilled workers by protecting their overall earnings.
This is borne out by results of the 1998 pay and working time annual survey by the University of Warwick Industrial Relations Research Unit, which examined developments in detail in 118 engineering workplaces. It found that firms were often operating in competitive labour markets as well as product markets, despite increasing job losses, as these were more likely to affect lower-skilled workers. One in three companies reported difficulties in filling vacancies, and employers were having to balance ability to pay with employee expectations in order to recruit and retain key employees. Overall pay rates and the components of pay remained stable, with average increases of 3.5%, few signs of a move to individual or performance pay and very limited "concession bargaining".
Skills shortages might also have contributed to longer overtime working. Over half of survey respondents reported that some members of their largest occupational group typically worked in excess of 48 hours a week. In turn, the rising cost of overtime reinforced competitive pressures to introduce alternative patterns of flexible working. Changes to working time such as introducing extra shifts, making existing shifts more variable or increasing temporary employment were reported by 72% of respondents. A further 8% said that they had introduced annual hours working, an increase from the 2.4% reported in the first survey in 1995 (UK9812165F).
Commentary
Manufacturing employers in 1998 were finding it increasingly difficult to fund settlements at the level of RPI, given falling volumes, prices and margins arising from increasing competitive pressures. As a result, settlements in 1999 are expected to fall, with many firms looking for longer-term agreements. Managers were also attempting to reduce overtime either through more shiftwork ing, or through other alternatives such as annualised hours. The introduction of more shifts and variable shifts enables managers both to extend working time and to increase flexibility in terms of customer responsiveness. In return for increased shiftworking, which in many cases augurs a move to continuous or semi-continuous production, employees have sometimes been offered a lower basic working week or improvements in pay, explaining in part the stability seen so far in pay settlements and earnings. Added to this have been skilled labour shortages which have made it even more important to address employee preferences and concerns. The key to understanding developments in pay and working time in the engineering sector is to be found in managers' efforts to reconcile external pressures on costs with the internal pressures of employee expectations.
The Warwick survey data also points to a sectoral momentum in changes to working patterns. As new shift patterns become more widely and firmly established, other firms introduce them as a flexible response to competition and to extend operating times. The "sector effect" can be important in disseminating changes in pay and working time, not least by adding the weight of legitimacy to the compulsion of competition. Facilitated by tough trading conditions, and with the added pressure of the new UK Working Time Regulations (UK9810154F), it is likely that developments such as annualised hours and variable scheduling arrangements, where some growth has already been detected in the Warwick surveys, will become increasingly commonplace in the engineering sector. (J Arrowsmith, IRRU)