Employers turn to skills and AI amid cost pressures

UK employers are focusing on productivity, workforce planning and skills development as rising costs and weaker confidence continue to weigh on hiring plans, according to the latest Labour Market Outlook from the CIPD.

The quarterly report found that cost management is now the leading organisational priority for 58% of employers, ahead of productivity improvement and market growth. At the same time, one-third of employers continue to report hard-to-fill vacancies despite a broader slowdown in recruitment activity.

The findings point to a labour market where employers are recruiting more cautiously while continuing to face capability gaps in key areas. The CIPD said organisations should focus on workforce planning, skills development and the effective use of AI to improve productivity.

James Cockett, senior labour market economist at the CIPD and author of the report, said: ‘With so much happening externally, organisations should focus on the areas they can directly influence. This means taking a proactive approach to workforce planning and ensuring investment in technologies such as AI is supported by the right mix of people, skills, and systems to deliver meaningful productivity gains’.

The report suggests employers are looking to technology investment and workforce capability as alternatives to large-scale recruitment growth. Improving productivity was identified as a priority by 44% of employers overall and by 55% of large private sector organisations.

The CIPD said generative AI is likely to play a growing role in productivity strategies, particularly among larger employers. However, the report also warned that successful adoption would depend on management capability and workforce readiness.

‘People professionals have a key role to play in AI adoption, with a people-centred approach needed in moving the dial from experimental to strategic use,’ the report said.

Despite softer hiring conditions, skills shortages remain a concern. One-third of employers said they currently have hard-to-fill vacancies, while sectors including healthcare, education and technology continue to report recruitment pressures.

The report also highlighted growing pressure on organisations to strengthen management and compliance capability ahead of reforms under the Employment Rights Act 2025. The CIPD warned that many SMEs may lack the HR support and internal expertise needed to respond effectively to the changes.

Alongside workforce planning and skills investment, the report urged organisations to strengthen people management capability, support employee financial wellbeing and prepare managers for changes in employment relations and trade union rights.

The Labour Market Outlook is based on a survey of more than 2,000 UK employers conducted between March and April 2026.

Key statistics

• 58% of employers say cost management is their top priority
• 44% cite productivity improvement as a key focus
• 55% of large private sector employers prioritise productivity
• 33% of employers report hard-to-fill vacancies
• Net employment balance remains subdued at +10
• 22% of employers expect redundancies in the next three months
• Public sector redundancy expectations rise to 26%
• Median expected pay award remains at 3% for the eighth consecutive quarter
• 20% of SMEs identify regulatory compliance as a priority
• 63% of employers plan to recruit in the next three months

Download the CIPD labour market outlook report.