UK Labour Market Struggles
The UK labour market is facing significant challenges, with unemployment rising to its highest point in four years. The latest data from the Office for National Statistics (ONS) shows that the unemployment rate for those aged 16 and over increased to 4.7% in May. This is well above pre-pandemic levels, indicating a struggling labour market.
Impact of Tax Hikes on Businesses
The recent tax hikes on businesses, introduced by Chancellor Rachel Reeves, have been cited as a contributing factor to the labour market’s struggles. The increase in employer National Insurance contributions has made it more costly for firms to hire and retain employees. This policy change has led to a decline in job vacancies and a slowdown in wage growth.
Weakening Jobs Market
The jobs market is weakening, with more people being made redundant and fewer new vacancies being posted. The number of payrolled workers in the UK fell by 135,000 (0.4%) in the year to May 2025, and was down by 68,000 (0.2%) in the three months to May. The number of vacancies in the country also fell again by 56,000, to 727,000, in April to June 2025. This is the 36th consecutive month where vacancies are lower when compared to the previous quarter.
Industry Sectors Affected
The ONS reports that there are fewer jobs in 14 of the 18 industry sectors that it divides the UK economy into. This indicates that firms in the country are not recruiting new workers, or that they may not be replacing workers who left the company. Experts warn that the policy could harm the UK’s labour market and suppress the availability of jobs.
Wage Growth Continues to Slowdown
Alongside a slowdown in the labour market, workers in Britain have also seen a decline in how much their wages are growing. Annual growth in average weekly earnings was 5% for both regular earnings and total earnings (which includes bonuses), a decline from the previous three-month period. When adjusting these figures for inflation, which unexpectedly jumped to 3.6% in June, pay growth looks incredibly paltry. Real-terms regular earnings grew by just 1.1% in the three months to May, while real-terms total earnings grew by just 1% in the same period.
Sectors with Fastest Pay Growth
Pay in the private sector was 4.9%, while pay in the public sector is considerably higher, at 5.5%, following the government’s inflation-busting pay rises for public sector workers. Slowing wage growth can significantly impact household finances, especially if pay growth dips below inflation, as earners will start paying more of their pay packets on household bills, and will have less money to save, pay down debt, and maintain their living standards.
What Does a Slowdown in the Labour Market Mean for Interest Rates?
A slowdown in the labour market could spur the Monetary Policy Committee (MPC) to make larger interest rate cuts at their next meeting. The MPC has cut interest rates four times since July 2024 at a broadly quarterly rate, and decided to keep the base rate at 4.25% at its last meeting. The committee’s next meeting will be on 7 August, with some analysts expecting a cut – the likelihood of this seems to have increased following the poor labour market statistics.
Delicate Balancing Act
The Bank of England faces a delicate balancing act, as it needs to keep inflation down while also supporting the labour market. With inflation still above target but labour market conditions loosening, the Bank will be especially vigilant in light of June’s inflation figures, which showed a slight uptick in headline CPI to 3.6%. Markets had been increasingly pricing in a rate cut as soon as August, but yesterday’s inflation surprise may temper those expectations.
Conclusion
The UK labour market is facing significant challenges, with rising unemployment, slowing wage growth, and a decline in job vacancies. The recent tax hikes on businesses have contributed to the labour market’s struggles, and the Bank of England will be closely watching the labour market statistics when deciding on interest rates. A slowdown in the labour market could lead to larger interest rate cuts, but the Bank faces a delicate balancing act in keeping inflation down while supporting the labour market. As the labour market continues to struggle, it is essential to monitor the situation closely and make informed decisions to support the economy.
