Unemployment in the UK has risen to its highest level since lockdown in 2021, while wage growth has cooled to its weakest pace in more than three years, according to the latest data from the Office for National Statistics (ONS).
Figures released on Tuesday show the unemployment rate rose to 4.8% in the three months to August, up from 4.7% in the previous quarter – the highest since the three months to May 2021. A single-month estimate puts the unemployment rate at an even higher 5.3%, the steepest rise since October 2020.
At the same time, regular wages (excluding bonuses) rose 4.7%, the slowest pace since the start of 2022, while overall wage growth (including bonuses) rose slightly to 5%. The ONS said that while profit growth was still well above pre-pandemic norms, momentum had slowed significantly in recent months.
The combination of higher unemployment and weaker wage growth will provide some comfort to Bank of England policymakers who fear wage pressures are fueling ongoing inflation.
Inflation has remained at 3.8% for two months in a row and is expected to rise to around 4% in September, still almost double the bank’s 2% target.
Economists said the latest jobs data could strengthen the case for interest rate cuts in 2026 as hiring slows and wage settlements weaken.
“We believe it is only a matter of time before labor market easing leads to a more significant slowdown in wage growth,” said Ashley Webb, British economist at Capital Economics. “This would allow the bank to reduce interest rates from the current 4% to around 3% next year.”
Younger workers are hit hardest as vacancies fall
According to the ONS, the rise in unemployment was largely due to younger workers, while the number of people over 65 in work reached a record high.
“After a long period of weak recruitment activity, there are signs that declines in both payrolls and vacancies are now leveling off,” said Liz McKeown, director of economic statistics at the ONS. “We are seeing different patterns across different age groups, with record numbers of older people in work but more young people out of work.”
Total job vacancies fell by 9,000 to 717,000, the lowest level since 2021. Meanwhile, the number of employed people fell by 10,000 in September and is now down 126,000 compared to October 2024 – shortly after the government announced £40 billion in tax rises.
Economists said the rise in employers’ national insurance contributions (NICs) and last year’s 6.7% increase in the minimum wage had increased cost pressures for employers and contributed to a slowdown in hiring.
“The rise in employers’ NICs and the minimum wage have clearly weighed on hiring,” said Martin Beck, chief economist at WPI Strategy. “Summer numbers suggest the worst of the damage is over, but the overall trend is one of stagnation.”
In the private sector, wage growth slowed to 4.4%, the weakest in nearly four years, while public sector wages rose faster, reflecting several delayed wage payments from 2024.
The ONS also noted that August saw the fewest working days lost to strikes in almost six years, suggesting an easing of industrial tensions across the economy.
The data underscores the delicate economic backdrop facing Chancellor Rachel Reeves as she prepares her budget for November 26, which is expected to include tens of billions of dollars in tax rises to restore fiscal balance.
The pound weakened 0.4% after the release, trading at $1.32 against the dollar and €1.14 against the euro. UK government bond yields fell slightly, with the 10-year UK government bond yield falling two basis points to 4.65%.
Pat McFadden, the pensions minister, said the figures showed “record numbers of people working and looking for work” but admitted “too many people remain excluded from employment or training”.
Analysts said the overall message was clear: the labor market was cooling and while that could help curb inflation, it also highlighted the fragility of the UK’s post-pandemic recovery.
