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UK unemployment has climbed to 5.2%, marking its highest level in almost five years, while wage growth continues to ease—fueling expectations that interest rates could be reduced again in the spring.
According to the Office for National Statistics (ONS), the unemployment rate reached 5.2% in the three months to December, up from 5.1% in the previous period and in line with economists’ forecasts. This is the highest rate since the quarter ending January 2021. Joblessness has been gradually increasing since 2022, with many businesses blaming higher taxes introduced by Chancellor Rachel Reeves in her last two budgets. In particular, increases in employer national insurance contributions (NICs) and the minimum wage have added to cost pressures.
Young people appear to be hardest hit by the slowdown in hiring. Unemployment among 18- to 24-year-olds rose to 14% in the three months to December—the highest in five years, or nearly 11 years excluding the pandemic period. Concerns are growing that the UK is slipping in global youth employment rankings.
Martin Beck, chief economist at WPI Strategy, said higher labour costs—driven by increased employer NICs and minimum wage rises—are weighing heavily on entry-level recruitment. He added that firms may also be reconsidering junior roles due to rapid advancements in artificial intelligence.
Meanwhile, wage growth is slowing. In the three months to December, regular pay (excluding bonuses) in Great Britain rose by 4.2%, down from 4.4% in the previous month. Private sector pay growth slowed to 3.4%, its weakest level in five years, while public sector wages increased by 7.2%. After adjusting for inflation, real pay growth excluding bonuses was just 0.8% between October and December—the lowest since August 2023.
Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, warned that pay growth is likely to weaken further as rising layoffs and higher employment costs reduce workers’ bargaining power.
Company payroll numbers also declined, falling by 134,000 compared with a year earlier and by 46,000 over the quarter. In January alone, payrolls dropped by 11,000. However, the ONS revised its earlier estimate for December, reducing the reported monthly fall from 43,000 to just 6,000.
These figures suggest the Bank of England may cut interest rates again in the spring, as easing wage pressures point to softer inflation risks. The Bank expects unemployment to rise to 5.3% this year and forecasts wage growth will slow from 3.4% last year to 3.25% by year-end. At its latest meeting, the Bank held interest rates steady at 3.75%.
Paul Dales, chief UK economist at Capital Economics, said the continued weakness in the labour market and slower wage growth increase the likelihood of further rate cuts, with March now appearing more likely than April for the next reduction.
Inflation rose to 3.4% in December, up from 3.2% in November, with January’s figures due to be released soon.
Work and Pensions Secretary Pat McFadden acknowledged that more needs to be done to boost employment. He highlighted the government’s £1.5bn initiative to tackle youth unemployment, including efforts to make apprenticeships more accessible and create 50,000 new apprenticeship opportunities.
