Australian employers report that almost one in five workers are not proficient in their role and a majority (57%) believe skills gaps are having a negative impact on productivity, according to the latest ARHI Quarterly Work Outlook report.

The report also shows a fall in pay increase expectations. The survey found employers expect the mean basic pay increase (excluding bonuses) to be 3% in the 12 months to April 2025 – down from the 3.7% previously predicted for the 12 months to January 2025.

The survey uncovered significant differences between the public and private sectors when it came to pay expectations, perceptions of proficiency and intended skills investment. The findings from this quarter’s survey align with the Reserve Bank of Australia’s (RBA’s) view that while the labour market has eased, it remains tight, with wages growth higher than is sustainable at current levels of productivity growth.

Wage expectations were higher in the public sector (4.5%) than in the private sector (2.6%). However, public sector employees were more likely (24%) to be perceived as not proficient in their role than private sector employees (18%). In the next 12 months 53% of public sector employers intend to increase skills investment compared to 34% of private sector firms.

Recruitment difficulties continue to plague employers with 40% of those who are recruiting reporting trouble doing so (up from 38% last quarter).

The most common employee responses to tackle recruitment difficulties are upskilling existing employees (30%), raising wages (23%) and improving benefits (22%). More than one-third (37%) of organisations plan to increase training investment in the next 12 months, while 6% intend to cut their budget.

AHRI CEO, Sarah McCann-Bartlett said persistent high employee turnover would be coming at a financial cost to organisations and could be an understated cause of Australia’s sluggish productivity growth. Data also suggests that concerns about productivity may have led employers to keep a tighter lid on wage rises.

“Conditions in the labour market are softer than they were six months ago, but these latest Work Outlook results suggest that job prospects remain positive,” she said.

“This is leading to persistent recruitment difficulties and relatively high levels of employee turnover in many Australian workplaces. The results underline the importance of speed to competency as part of the induction and onboarding process to help support productivity, and employee engagement and retention.

“Organisations should also be giving serious thought to investing more in line management capability; especially given that evidence shows that a poor employee – line manager relationship can drive job dissatisfaction. It is also well-known that high-quality leadership and management results in higher productivity.”

McCann-Bartlett advised organisations wanting to boost productivity to ask themselves what changes needed to be made to retain talented employees and attract the best new talent.

“They may need to consider if their offering is sufficient, and whether they need to offer better pay, increased training or greater flexible working opportunities. Each workplace is unique, which is why a nuanced, considered approach is important.”