The UK jobless rate has reached its highest level in nearly five years, while wage growth continues to ease. Fresh data from the Office for National Statistics (ONS) point to a labour market losing momentum at the end of 2025.
The figures arrive at a delicate moment for the economy, with businesses adjusting to higher employment costs and policymakers weighing further interest rate cuts. According to official data and economists’ assessments, the balance between inflation control and labour market stability is becoming more complex.
Labour Market Weakens as Unemployment and Redundancies Edge Higher
Unemployment rose to 5.2% in the October to December quarter, up from 5.1% in the previous three-month period, according to the ONS. That marks the highest rate since early 2021. Payroll employment also declined, falling by 130,000 over the year and by 46,000 over the quarter, with a further provisional monthly drop recorded in January.
The data suggest that hiring activity has cooled. According to Liz McKeown, director of economic statistics at the ONS, the number of workers on payroll “fell further in the final quarter of the year, reflecting weak hiring activity,” while more people who were previously out of work are now actively seeking jobs.
Vacancies have remained broadly stable at 726,000, yet the ratio of unemployed people per vacancy has risen to 2.6, a new post-pandemic high. Redundancies are also showing an upward trend. The picture is not one of abrupt collapse, but of gradual softening, a shift that can be easy to overlook until the cumulative effects become clearer.
Young people appear particularly affected. The unemployment rate among 18- to 24-year-olds has reached 14%, its highest level in five years. According to analysts cited in the data, higher minimum wage costs over the past two years may have contributed to employers scaling back entry-level hiring, making it harder for younger workers to gain a foothold.
Political debate has followed swiftly. Opposition figures argue that recent increases in employer national insurance contributions and the minimum wage have made hiring more expensive. Business groups have echoed concerns about rising labour costs and regulatory complexity under the Employment Rights Act.
Wage Growth Cools, Strengthening Case for Interest Rate Cuts
At the same time, earnings growth has moderated. Regular pay, excluding bonuses, rose by 4.2% annually in the final quarter of 2025, down from 4.4% in the previous period. Total earnings growth also slowed to 4.2%.
When adjusted for inflation using the Consumer Prices Index, real regular pay increased by just 0.8%. That modest real-terms gain underscores the limited improvement in household purchasing power, even as nominal wages remain elevated compared with historical norms.
There is also a marked divergence between sectors. Public sector regular pay grew by 7.2% annually, compared with 3.4% in the private sector. According to the ONS, this gap partly reflects pay awards implemented earlier in 2025 than in the previous year, creating a base effect that is expected to diminish.
Economists say the softer wage data could influence monetary policy. Market pricing now indicates a rising probability that the Bank of England will reduce its key interest rate at its March meeting. Analysts at institutions including ING and Capital Economics argue that weaker employment and easing pay pressures support the case for further rate cuts.
The broader message is one of fragility. Economic growth has slowed, businesses remain cautious, and competition for available jobs is intensifying. For policymakers, the challenge lies in fostering stability without reigniting inflation, a delicate balancing act as 2026 unfolds.
