UK jobs market falters as employers pull back

UK jobs market falters as employers pull back – Rob Morgan, Chief Investment Analyst at Charles Stanley

The UK employment market continues to show signs of fatigue, with caution from employers translating into slower hiring, rising unemployment, and cooling wage growth.

• Unemployment has risen from 4.4% to 4.8% this year, reaching its highest level in four years.
• Employment levels are slipping, with payrolled employees down by around 100,000 over the past year.
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• Job vacancies have declined in a trend lasting three years so far, falling to 717,000 in the latest quarter.
• Yet wage growth remains strong, particularly in the public sector, with average earnings rising 4.7% in the three months to August, and total pay including bonuses increasing to 5.0% for the latest period.

What’s happening in the UK labor market?

Cracks in the labor market have been forming for some time, driven by a combination of weak economic growth, rising employment costs, and business uncertainty. The April increases to the National Living Wage and National Insurance contributions have added significant pressure, with employers now paying an additional £2,367 annually per full-time minimum-wage worker.

Meanwhile, automation and offshoring are quietly reshaping workforce dynamics, reducing headcount and limiting new opportunities in some areas. Mid-level roles are seeing the sharpest drop in hiring and entry level jobs are also harder to find.

The Autumn Budget looms at a critical moment. With business confidence waning and hiring plans scaled back, there is mounting pressure to restore economic momentum. Without decisive action the current trajectory could become entrenched, leaving the UK labor market stuck in a cycle of stagnation and missed opportunity.

What does it mean for interest rates?

Today’s employment data underlines the fragility of the labor market, potentially a warning sign of deeper economic troubles. Yet pay growth remains at rates incompatible with a return of inflation to the target rate of 2%.

With September’s CPI figure expected to come in around double the target, it’s a challenging backdrop for further easing. Although sub-4% interest rates will arrive at some point, it’s likely to be in early 2026 rather than this year.

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