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UK unemployment rose to a four-year high in the run-up to April’s steep increases in payroll taxes and the minimum wage as pay growth cooled, underlining the mounting strains in the labour market.
Employers cut the number of payrolled staff by 55,000 between March and April, the Office for National Statistics said on Tuesday, leaving headcount 0.4 per cent lower than in April 2024.
Provisional figures for May, although likely to be revised to show a smaller contraction, showed a month-on-month drop of 109,000 concentrated in hospitality and retail.
Vacancies fell, the number of people claiming jobless benefit rose and the unemployment rate, as measured by the troubled ONS labour force survey, edged up to a four-year high of 4.6 per cent — in line with economists’ expectations and up from 4.5 per cent in the three months to March.
Businesses are grappling with the higher national insurance contributions introduced in chancellor Rachel Reeves’ October Budget and the rise in the minimum wage. Both measures came into effect in April.
“The cooling in the UK jobs market is gathering pace,” analysts at ING noted. “Wage growth is slowing, too.”
The pound fell as much as 0.7 per cent against the dollar as traders moved to fully price in a quarter-point interest rate cut by the Bank of England’s Monetary Policy Committee at its September meeting, compared with a previous expectation of November. It was down 0.3 per cent by late afternoon at $1.351. The MPC has its next meeting next week.
The two-year gilt yield, which is sensitive to interest rate expectations, was down 0.07 percentage points at 3.94 per cent, while shares in housebuilders jumped in anticipation of a boost from lower borrowing costs.
Economists said the picture was still not as bleak as business surveys had suggested at the turn of the year, however, with hiring slowing rather than collapsing and some data sources pointing to resilience.
In contrast to the payroll data, the separate ONS workforce jobs survey showed continuing growth in the first quarter of the year, and the LFS-based figures showed the employment rate rose 0.1 percentage point on the quarter to 75.1 per cent.
This suggests unemployment rose because people previously classed as economically inactive were starting to look for work.
But Ben Harrison, director of Lancaster university’s Work Foundation, said the figures pointed to “a challenging jobs market to find work in”, undermining the government’s ambition to bring people back into the labour market and boost employment during the remainder of the parliament.
Economists said Tuesday’s data would reassure policymakers that underlying inflationary pressures in the economy were easing, despite a sharp pick-up in headline inflation to 3.5 per cent in April.
Annual growth in average weekly wages, excluding bonuses, slowed to 5.2 per cent in the period, the ONS said. That was below analysts’ expectations of 5.3 per cent and down from 5.5 per cent in the three months to March.
Private sector pay growth was even weaker, with the overall figure buoyed by recent public sector pay deals.
BoE policymakers, who split three ways last month when the majority voted to cut the benchmark rate to 4.25 per cent, have made it clear that they see a slowdown in wage growth as the key to further monetary loosening.
“The jobs market is not collapsing . . . But most indicators show labour demand is clearly weakening,” said Ruth Gregory, economist at the consultancy Capital Economics.
The figures would not necessarily prompt a rate cut at the MPC’s next meeting next week but they supported the case to cut the cost of borrowing to as low as 3.5 per cent over the next year, she added.
Rob Wood, at the consultancy Pantheon Macroeconomics, said the labour market “looks in worse shape in May” but cautioned that the payroll numbers could overstate the extent of weakness, since they did not include any count of self-employment.
Andrew Wishart, economist at Berenberg, said a shift from employment into self-employment, induced by the rise in payroll taxes, could help explain why the payroll figures painted a weaker picture than the LFS.
Additional reporting by Ian Smith and Emily Herbert in London
This article has been amended since publication to show the correct figure for the payroll drop in May
