Unemployment has hit a five-year high as youth joblessness reached historic levels amid a hiring freeze for entry-level jobs after the government’s multi-billion pound payroll tax increase.
The rate of unemployment in the UK economy ticked up to 5.2 per cent in the three months to December from 5.1 per cent previously and to the highest level since the quarter to January 2021.
Joblessness in the UK economy has steadily increased since 2022 but has accelerated by nearly one percentage point in the past twelve months, driven upwards by employment tax rises announced by Rachel Reeves, the chancellor, in her first budget just over a year ago.
Wage growth, excluding bonuses, fell to 4.2 per cent year-on-year in the three months to December, down from 4.5 per cent in November, data released by the Office for National Statistics (ONS) showed. The fall was in line with forecasts.
The labour market has been hit hard by the chancellor’s decision to raise employer national insurance contributions (NICs) by £25 billion in her first budget in October 2024, with younger workers seemingly bearing the brunt because of a sharp drop off in entry-level job opportunities in the retail, leisure and hospitality sectors. Increases to the minimum wage are also likely to have deterred businesses from hiring younger staff.
The rate of youth unemployment climbed to 16.1 per cent at the end of last year, the highest level since 2014 and above the average level in the European Union, 14.9 per cent, for the first time since data was available in 2000, according to the Resolution Foundation. At the turn of the millennium, youth unemployment in Britain was 12.9 per cent and 18 per cent in the EU.
Louise Murphy, a senior economist at the think tank, said: “[The government] must urgently turn [its] attention to the UK’s unemployment problems. At the end of last year almost one-in-six young people who wanted to work couldn’t find a job. Unemployment risks climbing even further in 2026.”
The number of employees aged 34 and under has fallen by 242,000 since mid-2024, when payroll employment peaked, while employment among those aged 35 and above has proved far more resilient, increasing by 71,000.
Since October 2024, payroll employment across the entire UK economy has fallen by more than 170,000 and job losses have been concentrated in sectors that saw the greatest relative increase in the cost of employment after the NIC and minimum wage increases took effect.
Martin Beck, chief economist at WPI Strategy, said: “Higher labour costs, reflecting last year’s increase in employer NICs and rises in the adult minimum wage appears to be weighing most heavily on entry-level hiring. At the same time, firms are likely reassessing junior roles in the face of rapid advances in AI.”
The faltering labour market strengthens the case for the Bank of England’s monetary policy committee (MPC) to cut rates to 3.5 per cent when it next meets on March 19. According to Bloomberg, traders are now pricing in a 76 per cent chance of a rate cut next month.
In a note to clients, Paul Dales, chief UK economist at Capital Economics, wrote: “The lack of green shoots of recovery in the labour market and further fall in wage growth supports the idea that the Bank of England has at least a couple more interest rate cuts in its locker, with the chances of the next cut happening in March rather than April edging higher”.
This month the Bank of England voted 5–4 in favour of keeping borrowing costs at 3.75 per cent. The vote was much closer than City analysts expected, prompting financial markets to raise their estimate of the probability of a quarter-point rate cut at the next meeting to nearly 50 per cent.
Yael Selfin, chief economist at KPMG UK, said that the “data raises the prospect of the Bank of England resuming cutting interest rates in March. The MPC will be reassured by further evidence of pay pressures easing, and the labour market continuing to soften.”
Andrew Bailey, the Bank’s governor, said there was further scope for policy loosening this year after the meeting.
Inflation data published on Wednesday will be critical for the MPC. Economists forecast that the consumer prices index measure of inflation fell to 3 per cent in January, down from 3.4 per cent in December, driven by lower air fares, falling food prices and slower energy price inflation. That would be the lowest reading since last March.
Stephen Kinnock, a health minister, told Times Radio: “We know that we had the best growth of all the G7 European countries last year and on unemployment, I think we’ve seen something like 440,000 new jobs created in the economy.”
Pointing to investment in apprenticeships and other schemes to get people back into work, he added: “We’re taking active measures to get more people back into work. But of course, there’s still a long way to go, given the appalling economic inheritance that we got in July 2024.”
The pound fell by 0.25 per cent against the dollar to $1.35 and the FTSE 100 increased by 0.51 per cent. The yield on the benchmark ten-year UK government bond slid by 0.04 percentage points to 4.36 per cent amid growing expectations for a spring rate cut.