Labour Market Weakness Concentrated in Consumer Sectors

While unemployment is trending upwards and recruitment surveys indicate continued deterioration, the current weakness appears largely confined to industries directly serving consumers. This is attributed, in part, to the impact of last year’s increases in payroll taxes (National Insurance) and the National Living Wage. For example, employment in the hospitality sector has declined by nearly 3% since the beginning of 2025, although it remains 2% above pre-pandemic levels. However, overall economic output remains 6% lower than before the COVID-19 pandemic, suggesting further job losses may be inevitable.

Outside of these consumer-facing roles, the employment picture is less concerning. While the private sector is experiencing a slight downward trend in payroll growth, the decline is moderate. Furthermore, there hasn’t been a significant surge in redundancies across the broader economy, and the number of job vacancies has stabilized.

Bank of England Weighs Options

Analysts believe the latest data strengthens the case for the Bank of England to resume cutting interest rates in March. The Monetary Policy Committee (MPC) will likely be encouraged by the easing of wage pressures and the softening labour market. The Bank may also proactively lower rates to mitigate potential downside risks to employment ahead of its next comprehensive economic forecast in April.

Headline pay growth slowed to 4.2% in December, down from 4.4% previously. This deceleration was partly driven by a reduction in public sector wage settlements, which fell for the first time since July 2025. Weak demand for labour is diminishing workers’ bargaining power, and falling household costs are expected to further moderate pay demands. Forecasts suggest pay growth will fall to 3% by the end of 2026.

Businesses appear to be holding back on hiring plans following November’s budget announcement, and this hesitancy has yet to dissipate. This potentially highlights the lasting effects of rising costs faced by companies, including increased minimum wage expenses, national insurance contributions, business rates, and concerns surrounding the Employment Rights Act.

Recent positive economic indicators have been overshadowed by this latest data, suggesting a more challenging economic outlook. The labour market is demonstrably loosening, with wage growth (including bonuses) easing to 4.2% and the unemployment rate rising to 5.2%.

Wage growth is currently being sustained by the public sector, while the ratio of unemployed individuals to job vacancies has reached 2.6 – the highest level in over a decade, excluding the pandemic period.

Although overall employment remains relatively stable and the rate of redundancies has slowed, the impact of the economic slowdown is not evenly distributed. Young people, individuals with disabilities, and men are disproportionately affected by the rising unemployment figures.

Youth unemployment now stands at 14.0%, the highest rate in five years. This represents an increase of 80,000 young people (aged 18-24) seeking work in the last quarter, bringing the total to 575,000. While more young people are actively looking for employment, many are struggling to find it.

What long-term strategies can the government implement to address the rising youth unemployment rate and equip young people with the skills needed for the evolving job market?

Considering the concentrated impact on consumer-facing industries, how might businesses adapt to navigate these challenges and maintain employment levels?

Frequently Asked Questions

• What is the current unemployment rate in the UK?

  The current unemployment rate in the UK is 5.2%, as of the latest data released for October-December 2025.

• How likely is a cut to UK interest rates in March?

  Financial markets currently assign a 75% probability to a 0.25% interest rate cut by the Bank of England at its March meeting.

• Which sectors are most affected by the current economic slowdown?

  Consumer-facing industries, such as hospitality, are experiencing the most significant job losses due to increased costs and reduced consumer spending.

• What is driving the slowdown in wage growth?

  The slowdown in wage growth is attributed to easing public sector wage settlements, weak demand for labour, and falling household costs.

• What is the youth unemployment rate in the UK?

  Youth unemployment (ages 18-24) currently stands at 14.0%, the highest rate in five years.