In a worrying sign for the UK economy, the latest employment figures from the Office for National Statistics (ONS) show that the jobless rate has crept up to 4.3% in the three months to September. This uptick in unemployment, coupled with a slowdown in wage growth, paints a picture of a labor market that is beginning to cool off after months of post-pandemic recovery.
The rise in unemployment, while seemingly small, marks a notable shift from the 4% rate seen in the previous quarter. This change suggests that the robust job creation that characterized much of 2024 may be losing steam, a trend that could have significant implications for the wider economy if it continues.
Payrolls Dip and Vacancies Fall
Beyond the headline unemployment rate, other indicators also point to a softening job market. The number of employees on company payrolls fell by 9,000 over the quarter, a development that will likely concern policymakers hoping for sustained job growth. Additionally, job vacancies declined for the 28th month in a row, hitting their lowest level since May 2021. This suggests that businesses may be becoming more cautious about hiring amid economic uncertainty.
Rising Employment Costs Worry Businesses
One factor that may be contributing to the cooling job market is the rise in employment costs facing businesses. The government’s recent budget included an increase in employer National Insurance contributions (NICs), a move that has drawn criticism from business leaders who warn it could lead to job cuts.
Major retailers like Asda, Sainsbury’s, and Tesco have already sounded the alarm over the NIC hike, with Asda and Sainsbury’s estimating it will cost them £100 million and £140 million respectively. Tesco, meanwhile, is bracing for a staggering £1 billion increase in its National Insurance bill over the course of this parliament. These companies have cautioned that they may need to pass on these additional costs to consumers in the form of higher prices.
“The labour market continues to split with signs of employers’ weakening intentions to hire at the same time as a welcome fall in inactivity. These figures come against a backdrop of rising concern about spiralling employment costs which are set to increase following last month’s NICs rise, the employment rights bill and the latest increase in the national living wage.”
– Matthew Percival, CBI
Pay Growth Slows Despite Tight Labor Market
In another sign of a shifting job market, pay growth has started to decelerate. Annual growth in employees’ average regular earnings, excluding bonuses, eased to 4.8% in the three months to September, down slightly from 4.9% in the previous three-month period. While this rate of wage growth is still outpacing inflation, which dipped to 1.7% in September, the slowdown suggests that the fierce competition for workers that has characterized the post-pandemic period may be starting to ease.
However, when bonuses are factored in, pay growth actually accelerated from 3.8% to 4.3%. But this uptick was primarily driven by one-off payments in the civil service, rather than a broad-based increase in bonus payments across the economy.
“While it is encouraging to see real pay growth, more needs to be done to improve living standards, which is why the increase in the living wage is important. But 2.8 million people – a near record number – are locked out of work due to poor health. This is bad for people, bad for businesses and it’s holding our economy back.”
– Liz Kendall, Work and Pensions Secretary
Economic Inactivity Remains a Concern
Despite the rise in unemployment, the UK continues to grapple with high levels of economic inactivity – that is, working-age people who are neither in work nor looking for a job. According to Work and Pensions Secretary Liz Kendall, some 2.8 million people are currently “locked out of work” due to poor health, a figure she described as “a near record number.”
Kendall argued that this trend is “bad for people, bad for businesses and it’s holding our economy back.” In response, the government has pledged to bring forward what it calls the “biggest reforms to employment support in a generation,” backed by an additional £240 million in investment. These reforms will form part of a broader “Get Britain Working” plan aimed at boosting labor force participation and productivity.
Storm Clouds on the Economic Horizon
The mixed picture painted by the latest jobs data will likely reinforce concerns among policymakers and business leaders about the health of the UK economy. While the labor market has been a bright spot in recent years, supporting consumer spending and powering the post-pandemic recovery, the slowdown in job creation and wage growth suggests that this engine of growth may be starting to sputter.
At the same time, rising employment costs – driven in part by government tax and regulatory changes – risk putting further pressure on businesses already grappling with a host of economic headwinds, from slowing global growth to post-Brexit trade frictions. If these costs lead to job cuts or slower hiring, as some business groups have warned, it could exacerbate the cooling of the labor market and weigh on economic activity more broadly.
For policymakers, the challenge will be to strike a balance between supporting businesses and job creation on the one hand, and funding vital public services and investing in the skills and productivity of the workforce on the other. With the economic outlook increasingly uncertain, navigating this tightrope could prove to be one of the defining challenges of the coming years.
