UK Unemployment Climbs to Post-Pandemic Peak Amid Slowing Wage Growth
Official statistics from the Office for National Statistics (ONS) indicate that the UK labour market continued to weaken in the final quarter of last year, with unemployment rising to its highest level since the early stages of the pandemic. The joblessness rate increased to 5.2 per cent between October and December 2025, slightly exceeding market forecasts and marking a steady climb from previous periods.
Labour Market Shows Signs of Strain
The number of workers on company payrolls fell by 46,000 compared to the previous quarter, with provisional estimates suggesting an additional 11,000 jobs were lost in January 2026. Liz McKeown, director of economic statistics at the ONS, noted that while payroll numbers declined in the final quarter, reflecting subdued hiring activity, they have remained largely unchanged in the most recent month.
Jonathan Raymond, an investment manager at Quilter Cheviot, commented that the labour market is "showing signs of creaking when economic growth is difficult to come by," highlighting the broader economic challenges facing the UK.
Factors Contributing to the Slowdown
Businesses have been grappling with increased hiring costs due to government policies, including higher payroll taxes and an elevated minimum wage. Additionally, concerns over the impending Employment Rights Act have led to cautious hiring practices, with a recent survey indicating that one-third of firms plan to reduce hiring as a result of these measures.
The softening labour market has also contributed to a deceleration in wage growth. Average earnings including bonuses slowed to 4.2 per cent in the final quarter, down from 4.6 per cent previously, while earnings excluding bonuses increased by 4.2 per cent, slightly lower than the previous figure of 4.4 per cent.
Implications for Monetary Policy
The easing of wage pressures has heightened expectations that the Bank of England may reduce interest rates as early as March. Yael Selfin, chief economist at KPMG UK, stated that the data "raises the prospect" of a March rate cut, suggesting that the Monetary Policy Committee (MPC) will be reassured by the cooling labour market.
Paul Dales, chief UK economist at Capital Economics, echoed this sentiment, noting that the lack of recovery in the labour market and further decline in wage growth support the likelihood of additional interest rate cuts, with March now appearing more probable than April.
Following the data release, sterling slipped 0.3 per cent against the dollar, reflecting market anticipation of potential rate reductions. This economic shift underscores the ongoing challenges in the UK's post-pandemic recovery, with businesses and policymakers closely monitoring future developments.
