Brexit, technological change, demographics and government policy could all potentially disrupt the UK labour market and change the environment for businesses in the coming years, according to a report from the EY Item Club.

Slowdown in supply of workers

The report from the forecasting group foresees unemployment increasing amid a slower growth in jobs, with the unemployment rate forecast to increase from the current 4.8 per cent to 5.4 per cent next year and 5.8 per cent in 2019. The employment rate is expected to fall marginally by 2019, mainly as a result of a slowdown in the supply of workers.On pay, the report points out that, in 2005 when unemployment levels were similar, today's average earnings were increasing by almost five per cent a year. But for several years now, the average has been only between two and three per cent, and currently rises are falling behind surging inflation.

A victim of its own success

The report identifies a variety of reasons for the change in the relationship between unemployment and pay, including lower productivity, increased slack in the labour market, more available workers because of migration and older people staying in work, and shifts in the sector mix and the composition of employment, such as a decline in higher paid jobs.Martin Beck, senior economic adviser to the EY Item Club, said, "The UK labour market may be starting to become a victim of its own success."As the proportion of people in work has climbed ever higher, firms may have found it more difficult to fill vacancies, resulting in greater utilisation of the existing workforce and slower jobs growth."On a positive note, slower growth in the workforce may deliver a boost to what has been a long period of insipid productivity growth. With the flow of potential workers slowing, firms are likely to have more incentive to invest in improving efficiency or labour-saving technology."

Impact of Brexit: difficult to predict

The report says that, with detailed negotiations between the UK and EU yet to begin, the impact of Brexit is currently difficult to predict. "Similar uncertainty surrounds the impact of technology on the demand for labour, with views varying widely both on its potential size and timescale. The EY Item Club cites two studies which suggest the proportion of all jobs at risk ranges from nine to 47 per cent."The labour market has surprised most observers in recent years, and may continue to do so. Businesses certainly need to monitor developments in employment and pay at the macro level to identify potential shifts in the market and analyse the implications for their own organisations."

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The report says key areas for businesses to focus on include making assessments of future demands for labour across the business covering roles and skills; identifying areas that could potentially be impacted by changes in labour supply, especially due to Brexit, such as reduced availability of workers with specific skills currently sourced from EU countries; and developing contingency plans.EY also urges the monitoring of developments in pay for specific roles and skills, to ensure that rewards remain competitive and identify potential risks to margins from pockets of wage inflation; considering whether to invest more in skills development and training to improve the contribution of the existing workforce; and continual tracking of opportunities to use technology to reshape the workforce across the business.For related news and features, visit our HR section.Access hundreds of global services and suppliers in our Online Directory  Get access to our free Global Mobility Toolkit

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