UK unemployment rises to four-year high as wage growth slows

UK unemployment has unexpectedly risen to its highest level in four years, reaching 4.7% in May. The increase comes as the labour market continues to cool, defying expectations of stability from the Bank of England and economists. This marks a sharp shift in the nation’s employment landscape, which had previously shown signs of resilience.

The Office for National Statistics reported that wage growth has also slowed, with average weekly earnings excluding bonuses declining to 5% from 5.3%. Including bonuses, wages also fell from 5.4% to 5%. Although this remains broadly in line with forecasts, the cooling in pay growth is contributing to broader concerns about the economy’s trajectory. Over the past year, payrolls have contracted by 178,000 jobs, equivalent to a 0.6% decline. Most of the reductions have occurred in the eight months since higher payroll taxes were introduced by the government.

The slowdown and declining pay growth are expected to influence the Bank of England’s monetary policy decisions. Governor Andrew Bailey has recently indicated that the Bank is prepared to loosen monetary policy should further signs of labour market weakness emerge. Interest rates, which peaked at 5.25%, have already been reduced to 4.25%, and many investors are predicting another cut to 4% in August.

With a significant fall in the economic inactivity rate, which has dropped by 0.4 percentage points to 21%, the workforce is expanding. However, this has also contributed to the higher unemployment rate as the availability of labour has risen alongside shrinking payrolls. Vacancies across the UK decreased by 56,000 in the three months to June, reaching a three-year low of 727,000.

Despite the loosening labour market, inflation remains a pressing issue, with consumer prices rising by 3.6% last month, up from 3.4%. The Bank of England’s inflation target of 2% remains elusive. Economists are also concerned about the impact of higher National Insurance contributions for employers, which have been cited as a key driver of reduced hiring and wage constraints.

Sanjay Raja, a UK economist at Deutsche Bank, has stated that the pace of interest rate reductions is likely to remain cautious. The Bank’s current strategy of cutting rates every three months may not accelerate until further evidence of economic cooling emerges. While private sector earnings growth has settled to 3.7%, closer to the Bank of England’s desired level, there is still much uncertainty about the pace of economic recovery.