The unexpected fall in the UK unemployment rate to 4.9 percent was seen by Number 11 as evidence that the economy started the spring on a solid footing. However, business owners who read the fine print of Tuesday’s labor market numbers will find little reason to celebrate.
Key unemployment figures from the Office for National Statistics showed the rate fell to 4.9 percent in the three months to February from 5.2 percent in the previous quarter, well above City forecasts. But the improvement is due more to statistical sleight of hand than to underlying strength in hiring, as job vacancies fell to a five-year low of 711,000 and 11,000 workers were shed in March alone.
For Britain’s small and medium-sized businesses, the data shows the cumulative burden of the £25 billion increase in employers’ national insurance contributions last autumn. Since Chancellor Rachel Reeves announced the increase in October 2024, the number of employees has fallen by 143,000. This number obscures the disproportionate burden on smaller businesses with smaller margins to cover payroll costs and a smaller cushion against rising payroll taxes.
Wage growth has now slowed to its weakest pace since the peak of the pandemic. Regular wages rose 3.6 percent in the three months to February, compared with 3.8 percent, while private sector wage growth of 3.2 percent, the lowest since October 2020, is in stark contrast to the 5.2 percent recorded by public sector workers. For owners and managers in the hospitality, retail and professional services sectors, pressure on private pay is the clearest signal yet that hiring confidence in the system has fallen.
The numbers come from before the American-Israeli war with Iran broke out in late February and make the headlines appear significantly outdated. Ashley Webb, senior UK economist at Capital Economics, said the latest wages and jobs data were “early signs that the rise in energy prices due to the Iran war is weighing on companies’ hiring plans and is reflected in a further slowdown in wage growth.”
The International Monetary Fund has warned that the UK will be hardest hit by the conflict of all G7 economies due to its over-reliance on international gas prices. Inflation figures due on Wednesday are expected to show the overall rate rising to 3.3 percent in March from 3 percent in February, a development that will make the cost equation even more uncomfortable for the country’s 5.5 million SMEs.
A closer reading of the ONS publication reveals less flattering currents. Economic inactivity, meaning those of working age who are neither working nor actively seeking work, rose from 20.7 percent to 21 percent, with an additional 116,000 people dropping out of the labor market entirely. Liz McKeown, ONS director of economic statistics, attributed the shift largely to “fewer students looking for work alongside their studies”.
Remove this statistical quirk and the image becomes significantly darker. The number of unemployed people of working age fell by 88,000, but employment among 16 to 64 year olds actually fell by 5,000. A net increase of 17,000 in employment among those aged 16 and over suggests that it was older workers, rather than those of traditional working age, who took up the vacancies. In short, the labor market is shrinking at the edges while the overall rate is flattering its health.
For SME owners balancing their recruitment plans against rising input costs, the silver lining lies in Threadneedle Street. With the Bank of England’s monetary policy committee due to meet next Thursday, the slowing labor market could see the key interest rate stay at 3.75 percent or even cut later this year, rather than tightening rates to combat the Iran-led energy surge. Cheaper loans can’t offset a tax increase or a loss of customers, but for companies servicing variable-rate debt, it would provide at least some relief.
Whether that proves to be any consolation depends largely on how long the disruption in the Gulf lasts. Right now, the headline-grabbing job numbers flatter a labor market that, upon closer inspection, is crumbling, and small businesses know it.
