Unemployment remained at a near five-year high ahead of Rachel Reeves’ November budget, while wage growth continued to weaken, reinforcing expectations that interest rate cuts are getting closer.
Figures released on Tuesday by the Office for National Statistics showed the UK unemployment rate remained stable at 5.1 per cent in the three months to November. This is the highest value since the beginning of 2021 and largely corresponds to economists’ forecasts.
Unemployment has been rising steadily since 2022, with the latest data pointing to further strain on the labor market following tax rises announced by the Chancellor in her first two Budgets. Employers are struggling with higher costs at a time of subdued demand, making them increasingly reluctant to hire staff.
Liz McKeown, director of economic statistics at the ONS, said employment numbers had fallen again, with job losses last year concentrated in retail and hospitality. She said this reflected “continued weak hiring activity.”
Separate data from HM Revenue & Customs showed the number of wage and salary earners has fallen by 220,000 since the October 2024 budget. In the single month through December, employment fell by 43,000, the largest monthly decline since November 2020, the peak of the Covid-19 pandemic, although those figures are frequently revised.
According to the ONS, vacancies have increased slightly over the last period but remain broadly flat over the last six months after a sustained decline.
Yael Selfin, chief economist at KPMG UK, said recent private sector data suggested employers were still signaling their intention to curb hiring. Higher labor costs will continue to dampen labor demand, she said, and unemployment is expected to rise to 5.3 percent by year’s end.
Meanwhile, wage growth continued to cool. Average earnings excluding bonuses rose 4.5 percent in the three months to November, the slowest pace since spring 2022. Private sector wage growth fell to 3.6 percent, a five-year low, while public sector wages rose 7.9 percent.
Easing wage pressures are likely to strengthen the case for the Bank of England to cut interest rates further this year. Financial markets are currently pricing in two cuts in 2026 that would reduce the key interest rate from 3.75 percent to 3.25 percent.
Economists say the labor market has been hit particularly hard by the Chancellor’s decision to increase employers’ national insurance contributions by £25 billion in the October 2024 budget. Weak consumer spending, still-high borrowing costs and rising operating costs have increased pressure on businesses.
The proportion of people who are not employed, not working and not looking for a job fell from 21 percent to 20.8 percent in the quarter. Since Labor won the 2024 general election, the number of people in employment has risen by almost 500,000 to 32.6 million, suggesting higher unemployment is partly due to more people re-entering the workforce.
Bruna Skarica, chief UK economist at Morgan Stanley, said the key theme for the labor market had shifted. “The biggest challenge facing the UK labor market right now is unemployment, not inactivity,” she said.
Pat McFadden, the work and pensions secretary, said the government needed to “go further” to increase participation, particularly among younger people.
The markets reacted cautiously to the data. Britain’s 10-year government bond yield rose to 4.46 percent, sterling rose against the dollar and the FTSE 100 fell more than one percent as investors weighed the growth and interest rate outlook.
