Companies must raise skill levels to boost productivity but policy-makers must not distract firms with further employment legislation. These are the main conclusions of a report on employment trends, published yesterday by the Confederation of British Industry (CBI) and human resources consultant, William M Mercer.

Companies said that improving and utilising skills is more important to productivity than low labour costs and the freedom to adjust the size of the labour force. More than half of the respondents said high levels of workforce skills influenced competitiveness.

In part this priority results from concerns about skill shortages. Just over half of firms said that their performance had been affected by problems in recruiting skilled labour. This reflected shortages of specialist staff such as highly skilled IT and engineering staff. Thirty-eight per cent of employers also said that lack of skills among employees had an impact on company performance.

Yet employers are getting distracted from these priorities, says the CBI. More than four out of five firms said the burden of employment legislation had risen. Large companies expressed more concern than small ones, contradicting the belief that red tape is mainly an issue for small businesses.

John Cridland, CBI Director of Human Resources Policy, said: "Companies are increasingly aware of the need to improve staff skills, but red tape is distracting business from focusing on this and improving productivity. Firms are working hard to balance business and employee needs, but more legislation could tip the scales in the wrong direction."

The report includes evidence of employer commitment to improved people practices. Family-friendly policies are increasingly important with over two-thirds of companies having a family-friendly policy. Parental leave is the highest equal opportunities priority this year, and the fact that 86 per cent of employers do not offer paid parental leave explains why employers are so concerned about possible new legislation in this area.

Mark Edelston, European Partner at William M Mercer, added: "Up to now, many companies have tended to take a narrow view of people management by just focusing, for example, on employee costs or managing industrial relations issues. The report shows that, to maximise performance, a much broader approach is needed, taking account of how people are managed and developed, how they interact with work processes and technology and how they are motivated and rewarded."

Almost half of employers are training their staff beyond the needs of the job and a further fifth are considering doing so in the future.

Anna Lagerkvist