Unemployment hits post-pandemic high as wage growth slips
The labour market continued to loosen in the final quarter of last year, official figures show, with wage growth easing and unemployment climbing steadily higher.
The rate of joblessness crept up to 5.2 per cent between October and December, according to the Office for National Statistics (ONS), the highest level since early 2021 and slightly ahead of market expectations.
The number of workers on company payrolls also dropped 46,000 compared to the previous quarter, with provisional estimates suggesting another 11,000 jobs were lost in January.
“The number of workers on payroll fell further in the final quarter of the year, reflecting weak hiring activity, although it is largely unchanged in the latest month,” said Liz McKeown, director of economic statistics at the ONS.
Jonathan Raymond, investment manager at Quilter Cheviot, said the labour market was “showing signs of creaking when economic growth is difficult to come by”.
Work and pensions secretary Pat McFadden said: “Today’s figures show there are 381,000 more people in work since the start of 2025, but we know there is more to do to get people into jobs.
“Our £1.5 billion 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.”
New unemployment figures raise chance of rate cut
The labour market has come under pressure in recent months as businesses grapple with the extra costs of hiring imposed by the government, including an increase in payroll taxes and a higher minimum wage.
Businesses are also worried by the prospect of the Employment Rights Act, with a recent survey suggesting that a third of firms would reduce hiring as a result of the measures.
The loosening labour market also fed through into weaker pay growth, raising the chances that the Bank of England will cut interest rates in March.
Average earnings including bonuses slowed to 4.2 per cent in the final three months of the year, down from 4.6 per cent previously. City economists had expected it to remain roughly steady.
Excluding bonuses, average wages rose 4.2 per cent over the period, lower than the previous reading of 4.4 per cent but in line with expectations.
McKeown noted that private sector wage growth was at its lowest rate in five years, while public sector figures were still “elevated” as some of last year’s pay awards continue to feed through into the figures.
Yael Selfin, chief economist at KPMG UK, said the data “raises the prospect” of a March rate cut.
“The MPC will be reassured by further evidence of pay pressures easing, and the labour market continuing to soften. The Bank may also want to minimise downside risks to the labour market and lower rates ahead of the next forecast meeting in April,” she said.
Paul Dales, chief UK economist at Capital Economics, agreed that the chances of a March rate cut had increased.
“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,” he said.
The pound weakened 0.3 per cent against the dollar following the figures, a sign that investors think rate cuts are more likely.