UK unemployment rises to 5.1% as labour market weakens and wage growth cools

The UK unemployment rate has risen to 5.1 per cent, its highest level since January 2021, as fresh data pointed to a further cooling in the labour market and slowing wage growth.

Figures published by the Office for National Statistics (ONS) showed the jobless rate increased from 5 per cent in the three months to September to 5.1 per cent in the three months to October, in line with expectations from City economists and the Bank of England.

Unemployment remains particularly high among younger workers, with the rate for those aged 18 to 34 standing at 8.7 per cent, reflecting weaker employment prospects for graduates and early-career workers this year.

The data also showed a contraction in overall employment. The number of payrolled employees fell by 38,000 in November, following a decline of 22,000 in October, indicating continued job losses across the economy.

The latest figures come just days before the Bank of England’s interest rate decision on Thursday, where policymakers are divided over whether to deliver a fourth rate cut this year. The labour market has been steadily losing momentum, particularly in lower-paid sectors that have been hit by higher employer national insurance contributions since April.

Wage growth continued to slow, easing concerns about inflationary pressure. Average earnings growth slipped from 4.9 per cent to 4.7 per cent, while regular pay excluding bonuses fell from 4.7 per cent to 4.6 per cent in the three months to October.

A sharp divergence between public and private sector pay also emerged. Private sector wage growth slowed from 4.2 per cent to 3.9 per cent — the weakest since late 2020 — while public sector pay accelerated to 7.6 per cent. Economists said the gap was largely driven by public sector pay settlements agreed earlier this year, which are now feeding into year-on-year comparisons.

In several private sector industries, including finance, business services and construction, wage growth fell below 3 per cent — a level the Bank of England considers consistent with bringing inflation back to its 2 per cent target.

Redundancies also picked up pace, rising to 5.3 per 1,000 employees in the three months to October, the fastest rate since February 2021.

Andrew Wishart, economist at Berenberg, said the private sector was now experiencing a “jobs recession”.

“When we exclude public sector and adjacent work, jobs numbers are falling at the sharpest annual rate since the pandemic,” he said. “The upside surprise in wage growth driven by public sector pay should not deter the Bank of England from cutting rates this Thursday.”

The combination of rising unemployment and cooling pay growth is likely to strengthen the case for looser monetary policy. Bank governor Andrew Bailey has said he is waiting for further confirmation that inflation is on a sustained downward path, but could cast a decisive vote in favour of a rate cut to 3.75 per cent from 4 per cent.

Inflation data for November, due on Wednesday, is expected to show a slowdown from 3.6 per cent to 3.4 per cent annually. The Bank’s previous decision to hold rates was narrowly split, with a 5–4 vote to leave borrowing costs unchanged.

Callum McLaren-Stewart, economist at Citi, said policymakers should look beyond distortions in public sector pay.

“Real wages at an aggregate level are barely positive,” he said. “The inflation risk depends on whether businesses can pass on higher labour costs, which appears unlikely given the outlook for consumer demand through 2026.”

With unemployment rising and hiring weakening, attention will now focus on whether the Bank of England moves to support the economy with a further cut in interest rates later this week.

Amy Ingham

Amy is a newly qualified journalist specialising in business journalism at Business Matters with responsibility for news content for what is now the UK’s largest print and online source of current business news.