Unemployment is at nearly a five-year low as wage growth slows

Unemployment has remained stagnant for nearly five years ahead of Rachel Reeves’ November Budget, while wage growth continues to improve, bolstering expectations that interest rate cuts are imminent.

Figures published on Tuesday by the Office for National Statistics showed the UK unemployment rate held at 5.1 per cent in the three months to November. That’s the highest rate since early 2021 and broadly in line with economic forecasts.

Unemployment is set to rise slightly from 2022, with the latest data pointing to further pressure on the labor market following the tax increases announced by the chancellor in his first two budgets. Employers have been facing higher costs during times of low demand, making them more wary of hiring.

Liz McKeown, director of economic statistics at the ONS, said the number of people in paid employment had fallen again, with job losses over the past year concentrated in retail and hospitality. He said this reflected “the continued weak recruitment activity”.

Separate data from HM Revenue & Customs showed that payroll employment fell by 220,000 since the October 2024 Budget. In the month to December, payroll numbers fell by 43,000, the sharpest monthly drop since November 2020, when the Covid-19 pandemic hit, although these figures are regularly updated.

Vacancies have risen slightly in recent times, but remain the lowest in the last six months following a long-term decline, according to the ONS.

Yael Selfin, chief economist at KPMG UK, said the latest private sector data suggested employers were still showing their intention to hold back on hiring. High employment costs, he said, continue to dampen demand for workers, as unemployment may rise to 5.3 percent by the end of the year.

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 slowed to 3.6 percent, a five-year low, while public sector wages rose 7.9 percent.

The easing of wage pressures is expected to strengthen the case for the Bank of England to deliver another interest rate cut this year. Financial markets are currently betting on a double rate cut in 2026, which will bring the rate down to 3.25 percent from 3.75 percent.

Economists say the labor market has been hit hard by the chancellor’s decision to increase employers’ national insurance contributions by £25 billion in the October 2024 Budget. Consumer spending, rising borrowing costs and rising operating costs have added pressure on businesses.

The number of people unemployed, unemployed and not looking for a job, fell to 20.8 percent from 21 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, indicating that the high unemployment rate is partly driven by more people re-entering the workforce.

Bruna Skarica, chief UK economist at Morgan Stanley, said the key issue in the labor market has changed. “The biggest challenge for the UK labor market now is unemployment, not unemployment,” he said.

Pat McFadden, the work and pensions secretary, said the government “must go further” to increase participation, particularly among young people.

Markets reacted cautiously to the data. Yields on ten-year UK government bonds rose to 4.46 percent, sterling strengthened against the dollar, and the FTSE 100 fell more than one percent as investors weighed the outlook for growth and interest rates.