Unemployment climbs to 5% as UK labour market shows deepening strain

Britain's labour market is showing deepening signs of strain, with unemployment rising, payroll numbers falling and pay growth barely keeping ahead of inflation, according to the latest official figures.

The unemployment rate climbed to 5.0% in the three months to March, up half a percentage point on the year, in a clear signal that the long stretch of resilience in the jobs market may be coming to an end.

The data adds to a growing body of evidence that higher employment costs and economic uncertainty are prompting firms to rein in hiring, with implications for both household incomes and the Bank of England's policy decisions.

Jobs being shed

The early estimate of payrolled employees for April fell by 210,000 over the year and by 100,000 on the month, to 30.2 million. The decline points to employers actively shrinking their workforces rather than simply slowing recruitment.

Vacancies also continued their long downward slide, falling to 705,000 in the three months to April, below pre-pandemic levels and well down from the post-Covid hiring boom.

Recruitment specialists report that firms are increasingly cautious about taking on new staff, citing higher wage bills, rising employer costs and an uncertain economic outlook clouded by events overseas.

The squeeze has been felt unevenly across sectors. Hospitality, retail and other labour-intensive industries, where margins are thin and staffing costs loom large, have been among the quickest to pare back, while parts of the public sector and professional services have proved more resilient.

Young people hit hardest

Youth unemployment has emerged as a particular concern, rising to 16.2%, the highest level in more than a decade. Campaigners warn that a generation entering a weak jobs market risks lasting damage to their earnings and career prospects.

Economists note that young workers are often the first to be affected when firms pull back on hiring, as employers freeze entry-level recruitment before turning to redundancies among established staff.

There is also growing concern about so-called scarring effects. Research consistently shows that those who struggle to find work early in their careers tend to earn less and face higher unemployment for years afterwards, meaning a weak market now can leave a long shadow.

• Unemployment rate: 5.0%, up 0.5 points on the year
• Payrolled employees down 210,000 over the year to April
• Vacancies: 705,000, below pre-pandemic levels
• Youth unemployment: 16.2%, the highest in over a decade
• Regular pay growth: 3.4%, with real pay up just 0.1%

Pay barely keeping up

Wage growth has cooled alongside the softening jobs market. Regular earnings rose 3.4% in the three months to March, while total earnings including bonuses rose 4.1%. After accounting for inflation, real wage growth was just 0.1%.

That near-stagnation in real pay means households are seeing almost no improvement in their spending power despite headline wage increases, keeping the cost-of-living squeeze firmly in place.

The slowdown in pay growth cuts both ways. For workers, it means thinner pay rises at a time when bills are still climbing. For the Bank of England, however, easing wage pressure is a welcome sign that one of the main engines of domestic inflation may be losing some of its force.

“The labour market has been the economy's great strength for years. The worry now is that it is turning into a source of weakness, with young people bearing the brunt.”

Background

The UK jobs market remained remarkably tight for much of the period after the pandemic, with unemployment near historic lows and employers competing hard for staff. That dynamic has unwound over the past year as the economy has slowed.

Policymakers watch wage growth closely because rapid pay rises can feed into broader inflation, while a cooling labour market can be a sign that price pressures will ease. The data is also drawn from surveys and administrative records that the ONS has been working to improve, and the figures are subject to revision.

What happens next

The figures hand the Bank of England a fresh argument that the economy is cooling, but the persistence of above-target inflation complicates any case for rate cuts. The next labour market release will be scrutinised for signs of whether the slowdown in hiring is stabilising or gathering pace.

Ministers will also be watching anxiously, given the political and fiscal stakes. Rising unemployment pushes up welfare spending and dampens tax receipts, adding to the pressure on the public finances just as the Chancellor weighs her options for the autumn Budget.