Younger workers bore the brunt of a cooling labour market

Unemployment edged back upwards despite a decline in last month’s figures, as data revealed the UK jobs market deteriorated over the last quarter. The Office for National Statistics reported the UK unemployment rate stood at five per cent in the three months to March 2026. This marked a rise from the 4.9 per cent recorded in the previous month’s release.

Youth unemployment also climbed to 16.2 per cent, with activity rates for the age group falling simultaneously.

WPI Strategy economist Martin Beck highlighted that the drop in payrolled employees among those under 35 was more pronounced, falling by 296,000 since October 2024, compared to a rise of 18,000 for older workers.

“In other words, the slowdown is not being felt evenly. Younger workers continue to bear the brunt of a cooling labour market,” Beck said, as reported by City AM.

Vacancies declined further to a five-year low, laying bare the challenges facing job seekers in an increasingly subdued market.

The number of payrolled employees fell by 20,000 over the quarter, while an early estimate for the three months to April suggests a potential drop of 100,000 over the same period.

Bank of England officials are likely to take close note of fresh wage growth figures that may unsettle some policymakers.

Including bonuses, wage growth came in higher than anticipated at 4.1 per cent. Pay growth over the three months to March was 3.4 per cent when bonuses were excluded from the calculation, in line with economists’ forecasts.

“Latest figures suggest the labour market remains soft, with vacancies at their lowest level in five years and unemployment higher than a year ago,” said Liz McKeown, director of economic statistics.

The latest employment data provides additional insight into the condition of the British economy following the first quarter of the calendar year.

Jack Kennedy, senior economist at Indeed, described youth unemployment as a “flashing warning signal”.

“Vacancies are falling, payrolled employment is declining, and the jobless rate is rising – a combination that signals the squeeze on businesses from rising costs and uncertainty is now feeding through into tangible job market deterioration,” Kennedy said.

“The spike in joblessness among young people is a reminder that the workers at the beginning of their careers feel these pressures first and hardest.”

Separate GDP figures offered Rachel Reeves encouragement as the ONS estimated that the economy expanded by 0.6 per cent in the first three months of the year.

Projections for the employment market have been varied, with economists at the Office for Budget Responsibility and the Bank of England forecasting a peak unemployment rate of approximately 5.3 per cent.

Some City analysts have cautioned that joblessness could climb higher.

Welfare secretary Pat McFadden said a rise in the employment rate was “encouraging” yet the war in the Middle East was “casting a shadow on the labour market”. Shadow business secretary Andrew Griffith attributed the deterioration to the Labour government’s policies.

Monetary Policy Committee members, who determine interest rates every six weeks, will be scrutinising any signs of wage pressures closely.

This heightened focus on salaries comes as economists fear that rising inflation driven by the Iran war could push up wages, triggering a spiralling effect on price pressures.

The International Monetary Fund indicated that the Bank would not need to raise interest rates this year, despite a number of City firms predicting a hike.

The IMF cautioned that interest rates were heavily contingent on whether data remained in line with expectations.

Economists at both the Bank and across private sector firms will now be keeping a close eye on anticipated government welfare reforms.

The initial findings from the Alan Milburn review into young people not in education, employment or training (Neets) are expected to be released within days, outlining potential job market reforms to be put forward by any Labour leader.

Ahead of Tuesday’s jobs figures, a report by the Institute for Fiscal Studies revealed that only half of young people were on the payroll, as the Neets crisis has proven worse than anticipated.

According to the think tank, just 50.6 per cent of 16 to 24-year-olds were in employment between late 2022 and 2025. This represented a decline from a previous proportion of 54.9 per cent.

Two thirds of the population were participating in the labour force, while nearly one in nine young people, or 640,000 individuals, were claiming an out-of-work benefit, the research revealed.

Jed Michael, research economist at IFS and an author of a report on Neets, said there was insufficient evidence to explain why the Neets crisis had worsened beyond previous projections.

“The job of the Milburn review is made much harder by a lack of clarity as to what is driving the fall. While it does not seem to be down solely to a temporary cyclical downturn in the economy, more evidence is needed to understand the roles of minimum wages, youth mental health, AI and other factors,” Michael said.