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Good news for the Bank of England and by implication Rachel Reeves. The softening labour market has led to average earnings growth falling to 5%, its lowest level since June 2022.
With this inflationary pressure cooling, the Monetary Policy Committee is likely to vote to cut interest rates when it next meets on 7th August.
End of the good news. Now for some less good news
The UK unemployment rate in the three months to May 2025 has risen to 4.7%, its highest level since the pandemic, highlighting the growing challenges facing both jobseekers and policymakers amid a cooling economic environment and softening labour market.
The modest rise in unemployment reflects a slowdown in recruitment activity, with businesses cautious about hiring due to increased business costs, weak economic growth forecasts, elevated borrowing costs, and ongoing uncertainty in global markets — rather than a mass loss of jobs due to AI (yet).
The slowdown in recruitment also discourages employees looking to move jobs, further depressing the number of job vacancies.
As a second critical Autumn Budget creeps ever closer into focus, businesses are slowing down recruitment as they await details of the Chancellor’s fiscal decisions and how they will impact their operations.
Over the long-term, we are seeing a gradual softening of the labour market, with job vacancies continuing to decrease and now consistently below pre-pandemic levels. We are not yet seeing a jobs crisis, but employers are becoming more risk-averse — we can expect unemployment to nudge up again to 4.8% by the end of the year.
Chancellor Rachel Reeves faces growing pressure to respond. With inflation at 3.6% reaching its highest level in 18 months and her fiscal headroom limited by self-imposed rules, the Chancellor must balance calls for greater support to households and businesses with the need to maintain fiscal credibility.
The small rise in unemployment also has implications for public spending, already rising at an alarming rate. The ideal way to cut welfare spending is to ensure the nation’s workforce has access to enough stable and well-paying jobs — more people unemployed will ultimately increase the already heavy burden on the welfare state.
Although the labour market is softening, skill shortages remain an issue. Despite the Government signalling its commitment to addressing national skills gaps with the launch of Skills England in July 2024, this is a long-term problem that cannot be solved immediately — the mismatch between jobseekers and available opportunities suggests that deeper structural issues in the UK labour market remain unresolved.
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