UK Labour Market Cools as Wage Growth Slows and Payrolls Contract

Official figures released by the Office for National Statistics indicate signs of growing softness in the UK labour market. August saw a reduction of 8,000 in monthly payroll numbers, pushing total employment down to 30.3 million. Notably, revised figures for July show a smaller but still negative movement, with payrolls falling by 6,000 rather than the previously estimated 8,000. Over the past year, total payrolls contracted by 127,000 according to HMRC tax returns data. These trends mirror recent private sector surveys which have recorded declining demand for workers following the government’s move to raise payroll taxes in April.

The Office for National Statistics noted that pay growth is losing momentum. Average weekly earnings, excluding bonuses, slowed from 5 per cent to 4.8 per cent in the three months to July. Including bonuses, average wages rose by 4.7 per cent. This figure is likely to be used to adjust the state pension under the triple lock system from April next year. The triple lock mechanism guarantees an annual state pension increase by whichever is highest: average earnings growth, annual inflation measured in September, or 2.5 per cent. Market expectations suggest inflation will reach 4 per cent this month, raising weekly state pension payments from £230.25 to £241.05 in 2026.

Compared with the rest of the economy, the public sector is outpacing the private sector in pay growth. Those employed by the government have seen their wages rise by 5.6 per cent over the year, while the private sector figure stands at 4.7 per cent. The unemployment rate remains steady at 4.7 per cent, a level last observed four years ago. Monica George Michail, associate economist at the National Institute of Economic and Social Research, predicts that cooling conditions in the labour market will bring wage growth down to 4 per cent by the end of the year. The Bank of England has indicated that to maintain stable inflation, average wage growth should ideally fall within the 2 to 3 per cent range.

Markets widely expect the central bank to hold interest rates at 4 per cent in its upcoming policy meeting and possibly keep them there for the remainder of the year. Most members of the monetary policy committee are showing more concern about persistent inflation than about the slowdown in job creation. Latest data forecasts suggest inflation stood at approximately 3.8 to 3.9 per cent in August, well above the Bank’s 2 per cent target.

Attention is increasingly turning to private sector employment. According to economists, private sector jobs are contracting at an annualised rate of 2 per cent, far sharper than the overall 0.5 per cent annual decline in payroll employment. Although public sector hiring has provided some offset, prospects may dim should government spending remain unchanged in the forthcoming budget. The overall number of vacancies dropped by 10,000 to 728,000 in the most recent three-month period, marking the thirty-eighth consecutive month of falling job postings. The inactivity rate—elevated since the pandemic—fell by 0.2 percentage points to 21.2 per cent.

Sterling has responded moderately, gaining 0.3 per cent against the US dollar and slipping 0.15 per cent versus the euro. Meanwhile, gilt yields edged marginally lower on two-year and ten-year UK government bonds. All signals point to a labour market under continued pressure, with little immediate prospect of a substantial rebound.