New official figures have laid bare a deteriorating picture for the UK labour market, with unemployment reaching its highest level in nearly five years and pay growth cooling significantly, trends that are hitting younger workers hardest and strengthening the case for an imminent interest rate cut.
The Office for National Statistics reported that the unemployment rate rose to 5.2% in the three months to the end of December, up from 5.1% in the previous quarter and marking the highest rate since the three months to January 2021. This confirmed a steady upward trend in joblessness since 2022 and was in line with economists’ expectations.
Youth Bear the Brunt
The slowdown in hiring is disproportionately affecting the young. Unemployment for 18- to 24-year-olds surged to 14% in the last quarter of the year, the highest rate in five years—or nearly eleven years if the pandemic period is excluded—raising concerns that Britain is slipping down global league tables for youth employment.
Business groups have pointed to increased costs from government policy as a key pressure. They cite tax rises in Chancellor Rachel Reeves’s budgets, specifically sharp increases in employer National Insurance Contributions and the minimum wage. From April 2025, the employer NICs rate rose from 13.8% to 15%, while the threshold for contributions was lowered from £9,100 to £5,000, significantly raising payroll costs and leading to concerns about hiring freezes and a shift towards part-time work.
The minimum wage has also risen sharply over the past three years, increasing by 33% for 21-22 year-olds and 46% for 18-20 year-olds. While broader research suggests a muted effect on overall employment, economists warn it may be negatively impacting youth hiring. Martin Beck, chief economist at WPI Strategy, noted: “Higher labour costs, reflecting last year’s increase in employer NICs and rises in the adult minimum wage appear to be weighing most heavily on entry-level hiring.”
Alongside fiscal pressures, technological change is reshaping the jobs landscape. Businesses are reassessing junior roles in the face of rapid advances in Artificial Intelligence, which is automating entry-level positions in sectors such as law, finance, and administration.
The strain on businesses is reflected in falling payrolls. The number of people on company payrolls fell by 134,000 compared to a year ago, by 46,000 over the quarter, and by 11,000 in January alone. However, the ONS revised its estimate for the monthly decline in December sharply upwards, from an initial 43,000 to just 6,000.
Wage Growth Cools as Inflation Persists
While unemployment rises, the heat is coming out of pay growth. Wages excluding bonuses increased by 4.2% in Great Britain in the three months to December, easing from 4.4% the previous month. The private sector saw pay rise by just 3.4%, the lowest level in five years, while public sector wages grew by 7.2%. Once adjusted for inflation, annual pay excluding bonuses rose by a mere 0.8% from October to December, the lowest real-terms rate since August 2023.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said: “This slackening in pay growth is likely to gather momentum in the coming months as the downward pressure from mounting lay-offs and higher employment costs increasingly weakens workers’ bargaining position.”
Inflation, measured by the Consumer Prices Index, was 3.4% in December, up from 3.2% a month earlier. Economists forecast it will ease to around 3% for January, with the Bank of England expecting it to fall back to its 2% target by April 2026.
Interest Rate Cuts on the Horizon
The cooling labour market and moderating wage growth are pivotal for monetary policy, with markets now pricing in a high probability of a Bank of England interest rate cut as soon as March. The Bank has forecast that unemployment will rise to 5.3% this year and that wage growth will moderate to 3.25% by the end of the year.
Paul Dales, chief UK economist at Capital Economics, stated: “The lack of green shoots of recovery in the labour market and further fall in wage growth supports the idea that the Bank of England has at least a couple more interest rate cuts in its locker, with the chances of the next cut happening in March rather than April edging higher.” The Bank’s base rate was held at 3.75% at its most recent meeting.
Government Response and Historical Context
In response to the youth employment challenge, the government has launched initiatives including an £820 million package to tackle youth unemployment, stemming from its “Get Britain Working” white paper. This includes the Youth Guarantee, offering paid work opportunities for young people on Universal Credit for 18 months. Work and Pensions Secretary Pat McFadden said: “We know there is more to do to get people into jobs. Our £1.5bn drive to tackle youth unemployment is a key priority and this month we announced that we’ll make it easier for young people to find and secure an apprenticeship, which comes on top of our investment to create 50,000 new apprenticeships.”
To support businesses, reforms have increased the Employment Allowance from £5,000 to £10,500 to help offset higher National Insurance costs. The current unemployment rate of 5.2% represents a significant rise from the 4.11% rate recorded in 2024, and is the highest since the aftermath of the pandemic, echoing historical fluctuations in the UK jobs market.
