UK Labour Tax Increases Drive Surge in Underemployment and Business Cost Cutting

The UK labour market faces mounting pressure as employers grapple with the consequences of a substantial £26 billion National Insurance Contributions increase implemented in the previous year. The policy shift, combined with consecutive inflation-adjusted minimum wage rises, has triggered widespread operational adjustments across multiple sectors, with businesses resorting to reduced staffing levels and contracted opening hours to manage escalating labour costs.

Recent data from the Office for National Statistics reveals underemployment has climbed to 8.1 per cent as of September, marking the highest level recorded since early 2021. This figure represents workers actively seeking additional hours that employers cannot provide, an often overlooked dimension of the current employment crisis. Concurrently, unemployment has risen to 5.1 per cent in October, reaching its peak since January 2021, whilst payrolled employee numbers have declined by 187,000 over the twelve months to October.

The hospitality sector exemplifies the broader challenges facing labour-intensive industries. Industry data indicates approximately 65 per cent of hospitality businesses have curtailed available staff hours since April to reduce labour expenditure, whilst half have implemented headcount reductions. Garry Mallen, a Kent-based publican with four decades of industry experience, has discontinued his longstanding practice of employing university students during peak periods and reduced operating hours at two establishments to achieve necessary cost savings.

The national minimum wage increased by 6.7 per cent during the year, whilst the youth wage rose by 8.5 per cent. These adjustments, when combined with the employers’ NIC rise, have fundamentally altered the economics of workforce planning. Mallen noted the changes have eliminated incentives for youth employment, forcing difficult decisions that compromise service standards despite businesses striving to differentiate through quality and training.

Michael Kill, chief executive of the Night Time Industries Association, characterised the labour tax increase as placing severe pressure on the night-time economy. Non-revenue generating functions, including security and cleaning services, have frequently been eliminated or brought in-house, compelling salaried managers and landlords to assume additional responsibilities. Many establishments now operate with workforces stretched to capacity limits.

The beauty and wellness sector faces comparable pressures. Jamie Mettyear, proprietor of Mettyear’s Day Spa and Salon in Whitstable, recently reduced operations from six days to five days weekly to lower staff and energy expenditure. The consolidation allows more efficient resource allocation whilst reducing overall operational costs. Mettyear emphasised that unlike industries where software or automation can generate revenue, hairdressing and beauty services require physical labour, making staff costs a critical business expense.

The policy impact extends to apprenticeship programmes, which Mettyear has discontinued due to cost constraints. This represents a significant departure from the business’s earlier approach of recruiting three to four apprentices annually when operations commenced eight years ago. The decision highlights broader concerns about workforce development and entry-level employment opportunities for young people seeking to establish careers.

A Resolution Foundation analysis described the Chancellor’s employers’ NIC increase as a shock that has driven unemployment higher. The centre-left think tank recommended the Government adopt a more cautious approach to future job taxes and minimum wage adjustments, particularly for young workers. The report acknowledged that whilst the policy decision cannot be reversed, policymakers should exercise restraint regarding additional labour cost increases.

Helen Whately, shadow secretary of state for work and pensions, criticised the measures as having destroyed employment and undermined economic growth. She stated businesses consistently report that Labour’s policies, particularly the unemployment bill and employer taxes, have significantly complicated operations. Companies cannot afford current staffing levels, much less expand recruitment, resulting in substantial numbers of potential workers, especially young people, missing employment opportunities.

A Treasury spokesman defended the fiscal decisions as fair and necessary to deliver on national priorities, including reducing waiting lists, decreasing debt and borrowing, and lowering the cost of living. The Government maintains these measures provide essential funding for public services and economic stability.

The combined effects of increased employers’ NICs and minimum wage rises have created a challenging environment where businesses must balance cost management with service quality and workforce development. The situation presents particular challenges for young people entering the labour market, as employers become increasingly reluctant to offer entry-level positions or apprenticeships due to elevated labour costs. The longer-term implications for skills development, youth unemployment, and business competitiveness remain subjects of ongoing policy debate.