The UK labour market has shifted sharply from the post-Covid hiring boom, with rising unemployment, falling vacancies and declining payroll numbers raising concerns that the jobs market could deteriorate further this year.
In the spring and summer of 2022, UK businesses were attempting to recruit around 1.3 million workers, the highest level since records began and roughly 500,000 more than before the pandemic. At the time, unemployment stood at a historic low of about 3.5 per cent, while payroll employment rose for 37 consecutive months.
Those trends have now reversed. Vacancies have fallen to 729,000, a 44 per cent drop from the 2022 peak, while unemployment has climbed to 5.1 per cent, its highest level in nearly five years.
Payroll Jobs Fall After Rise in Employment Costs
Economists point to Chancellor Rachel Reeves’s first budget in October 2024 as a key turning point. The budget increased employer national insurance contributions by £25 billion and raised the minimum wage by 6.7 per cent, significantly increasing the cost of employment.
Since that budget, payroll employment has fallen by 187,000. Over the past decade, the only comparable annual decline occurred during the Covid-19 pandemic, when payroll jobs dropped by around 800,000.
Private sector wage growth has also slowed sharply, falling to a five-year low of 3.9 per cent from a peak of more than 8 per cent. Despite this, real incomes have grown faster since Labour came to power 18 months ago than in recent years, supported by easing inflation.
Employment Rises Despite Higher Unemployment
While unemployment has risen, the total number of people in work has increased by more than 600,000 since the 2024 general election, reaching 34.2 million close to a record high. This rise has been partly driven by population growth and immigration.
At the same time, the number of economically inactive people those not working and not seeking work has fallen by 312,000 to 9 million, or 21 per cent of the working-age population. As a result, some of the increase in unemployment reflects people re-entering the labour force, which economists regard as a positive development.
Economists Warn Policies Have Deepened the Downturn
Many economists believe the labour market downturn was inevitable after the post-pandemic boom, arguing that sustained strong hiring and wage growth would have fuelled inflation and constrained interest rate cuts.
However, critics say government policy has worsened the slowdown. Henry Cook, senior economist at MUFG, said: “The UK economy is losing jobs at a steady clip as government policy choices have reinforced the headwinds from sluggish demand and high interest rates.”
Sanjay Raja, chief UK economist at Deutsche Bank, warned that higher employer NICs make each job more expensive, placing young and low-paid workers most at risk.
Employment Rights Changes Add to Business Concerns
Further pressure may come from the Employment Rights Bill, which became law last month. The legislation strengthens worker protections, including limits on exploitative zero-hours contracts, expanded sick pay and enhanced union rights.
While the government argues the reforms will improve productivity and job quality, business groups fear the added costs could deter hiring, particularly in low-paid, youth-heavy sectors.
A revised government impact assessment published this month estimated employer costs at around £1 billion, down from an earlier estimate of £5 billion, after ministers dropped plans for day-one unfair dismissal rights.
Bank of England Watches Jobs Data Closely
There is growing consensus that unemployment will continue to rise this year. More than two-thirds of economists surveyed expect the jobless rate to reach between 5.5 per cent and 6 per cent in 2026, potentially an 11-year high.
If that occurs, economists expect the Bank of England to respond with further interest rate cuts. Rates ended 2025 at 3.75 per cent, down from 4.75 per cent at the start of the year.
The labour market remains a key fault line within the Bank’s monetary policy committee, as policymakers balance concerns over persistent wage growth against rising unemployment.
With inflation forecast to return to the 2 per cent target by spring, the health of the labour market is set to become the most important indicator shaping UK economic policy in the year ahead.
