Unemployment in the UK has risen to 5.2%, the highest level in nearly five years, while wage growth continues to slow, raising the prospect of another cut to interest rates in the spring.
The Office for National Statistics (ONS) said the rate of unemployment was 5.2% in the three months to the end of December, the highest rate since the quarter to January 2021. This was in line with what economists had been expecting and was up from 5.1% in the three months to November.
Joblessness in the UK has steadily risen since 2022, and businesses have complained that tax rises by Rachel Reeves in her last two budgets have exacerbated this, with rises in national insurance contributions (NICs) and the minimum wage causing particular issues.
Economists said younger workers were bearing the brunt of this slowdown in hiring. Unemployment for 18- to 24-year-olds was 14% in the three months to December, the highest rate in five years – or nearly 11 years excluding the pandemic – amid concerns that Britain is slipping down global league table for youth employment.
Martin Beck, the chief economist at WPI Strategy, said: “Higher labour costs, reflecting last year’s increase in employer NICs and rises in the adult minimum wage appear to be weighing most heavily on entry-level hiring. At the same time, firms are likely reassessing junior roles in the face of rapid advances in AI.”
In the three months to December, wages excluding bonuses in Great Britain increased by 4.2%, easing from 4.4% the previous month.
In the private sector, pay rose by 3.4%, the lowest level in five years, while wages in the public sector rose by 7.2%. Once adjusted for inflation, annual pay excluding bonuses rose by just 0.8% in October to December, the lowest rate since August 2023.
Suren Thiru, the economics director at the Institute of Chartered Accountants in England and Wales, said: “This slackening in pay growth is likely to gather momentum in the coming months as the downward pressure from mounting lay-offs and higher employment costs increasingly weakens workers’ bargaining position.”
The number of people on company payrolls also continued to fall, down 134,000 on a year ago, and by 46,000 over the quarter. On a monthly basis, payrolls fell by 11,000 in January.
However, a sharp monthly decline reported in December compared with November was revised upwards by the ONS, from its original estimate of a fall of 43,000 to a fall of just 6,000.
The figures suggest the Bank of England is likely to make another cut to interest rates by the spring, as inflationary pressures, such as higher wage growth, appear to be easing.
The Bank has forecast that the unemployment rate will rise to 5.3% this year and that wage growth will moderate from 3.4% last year to 3.25% by the end of the year as inflation falls. At the its recent meeting earlier this month, the Bank kept rates on hold at 3.75%.
Paul Dales, the chief UK economist at Capital Economics, said: “The lack of green shoots of recovery in the labour market and further fall in wage growth supports the idea that the Bank of England has at least a couple more interest rate cuts in its locker, with the chances of the next cut happening in March rather than April edging higher.”
Inflation – which measures the pace of price rises – hit 3.4% in December, up from 3.2% a month earlier. The ONS will release data for January on Wednesday.
The work and pensions secretary, Pat McFadden, said: “We know there is more to do to get people into jobs.
“Our £1.5bn drive to tackle youth unemployment is a key priority and this month we announced that we’ll make it easier for young people to find and secure an apprenticeship, which comes on top of our investment to create 50,000 new apprenticeships.”
