Unemployment in the UK remained at a near five-year high in the run-up to Chancellor Rachel Reeves’s November Budget, while wage growth continued to ease, reinforcing expectations that interest rate cuts could be on the horizon.
Figures released on Tuesday by the Office for National Statistics (ONS) showed the jobless rate holding steady at 5.1 per cent in the three months to November, the highest level since early 2021 and broadly in line with economists’ forecasts.
The data reflects a labour market under strain, with payroll numbers declining over the past year. Liz McKeown, director of economic statistics at the ONS, said the fall in employment was concentrated in retail and hospitality, highlighting “ongoing weak hiring activity.”
Separate figures from HM Revenue & Customs showed payroll employment had dropped by 220,000 since the October 2024 Budget, with December alone seeing a 43,000 decline, the sharpest monthly fall since November 2020, during the height of the Covid-19 pandemic. Vacancies edged up slightly but have remained broadly flat over the past six months.
Economists pointed to rising costs as a key factor in the subdued hiring environment. Yael Selfin, chief economist at KPMG UK, said higher employment costs were continuing to dampen labour demand, with unemployment likely to rise to 5.3 per cent by the end of 2026.
Wage growth also continued to slow. Average earnings excluding bonuses rose by 4.5 per cent in the three months to November, the slowest pace since spring 2022. Private-sector pay growth fell to 3.6 per cent, a five-year low, while public-sector wages increased by 7.9 per cent. Analysts said the easing of pay pressures could strengthen the case for the Bank of England to deliver further interest rate cuts, with financial markets currently pricing in two reductions this year that would take the base rate down to 3.25 per cent from 3.75 per cent.
Economists have highlighted the impact of policy decisions on the labour market, particularly the £25 billion rise in employer national insurance contributions introduced in the October 2024 Budget. Sluggish consumer spending, elevated borrowing costs, and rising operating expenses have also contributed to weak hiring.
The proportion of people economically inactive—those not working and not seeking employment—fell slightly to 20.8 per cent from 21 per cent over the quarter. Since Labour won the 2024 general election, total employment has risen by nearly 500,000 to 32.6 million, indicating that higher unemployment partly reflects more people re-entering the workforce.
Bruna Skarica, chief UK economist at Morgan Stanley, said the labour market’s main challenge has shifted from inactivity to joblessness. Work and Pensions Secretary Pat McFadden added that the government “must go further” to boost participation, particularly among younger people.
Markets responded cautiously. Ten-year UK government bond yields rose to 4.46 per cent, sterling strengthened against the dollar, and the FTSE 100 dropped by more than one per cent as investors weighed the economic outlook and interest rate expectations.
