Unemployment remained stuck at a near five-year high in the run-up to Rachel Reeves’s November Budget, while wage growth continued to ease, reinforcing expectations that interest rate cuts are edging closer.
Figures published on Tuesday by the Office for National Statistics showed the UK unemployment rate holding steady at 5.1 per cent in the three months to November. That is the highest level since early 2021 and broadly in line with economists’ forecasts.
Joblessness has been rising steadily since 2022, with the latest data pointing to further strain in the labour market following tax rises announced by the chancellor in her first two budgets. Employers have been grappling with higher costs at a time of subdued demand, making them increasingly cautious about taking on staff.
Liz McKeown, director of economic statistics at the ONS, said the number of employees on payroll had fallen again, with job losses over the past year concentrated in retail and hospitality. She said this reflected “ongoing weak hiring activity”.
Separate data from HM Revenue & Customs showed payroll employment has fallen by 220,000 since the October 2024 Budget. In the single month to December, payroll numbers dropped by 43,000, the sharpest monthly decline since November 2020, at the height of the Covid-19 pandemic, although such figures are often revised.
Vacancies edged slightly higher in the latest period, but remain broadly flat over the past six months following a prolonged decline, according to the ONS.
Yael Selfin, chief economist at KPMG UK, said more recent private-sector data suggested employers were still signalling their intention to curb hiring. Higher employment costs, she said, were continuing to dampen labour demand, with unemployment likely to rise to 5.3 per cent by the end of the year.
Wage growth, meanwhile, continued to cool. 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 slipped to 3.6 per cent, a five-year low, while public-sector wages rose by 7.9 per cent.
The easing in pay pressures is expected to strengthen the case for the Bank of England to deliver further interest rate cuts this year. Financial markets are currently pricing in two reductions in 2026, which would take the base rate down to 3.25 per cent from 3.75 per cent.
Economists say the labour market has been hit particularly hard by the chancellor’s decision to raise employer national insurance contributions by £25 billion in the October 2024 Budget. Sluggish consumer spending, still-elevated borrowing costs and rising operating expenses have added to the pressure on businesses.
The proportion of people who are economically inactive, not in work and not looking for a job, edged down to 20.8 per cent from 21 per cent over the quarter. Since Labour won the 2024 general election, the number of people in employment has risen by nearly 500,000 to 32.6 million, suggesting that higher unemployment has partly been driven by more people re-entering the labour force.
Bruna Skarica, chief UK economist at Morgan Stanley, said the key issue for the labour market had shifted. “The UK labour market’s main challenge now is joblessness, not inactivity,” she said.
Pat McFadden, the work and pensions secretary, said the government “must go further” to boost participation, particularly among younger people.
Markets reacted cautiously to the data. Yields on ten-year UK government bonds rose to 4.46 per cent, sterling strengthened against the dollar, and the FTSE 100 fell by more than one per cent as investors weighed the outlook for growth and interest rates.
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Unemployment stuck near five-year high as wage growth cools