UK Wage Growth Slows As Unemployment Rate Rises In Early 2025

Wage growth in the UK dropped to its lowest point since November, while the unemployment rate edged higher over the first quarter of the year. According to data released by the Office for National Statistics (ONS), pay growth in the three months to March slowed to 5.6 per cent, a slight decline from 5.9 per cent in the previous three months. This figure fell just below analysts’ expectations of 5.7 per cent growth.

Total pay, including bonuses, increased by 5.5 per cent, matching the public sector’s growth rate and barely lagging behind the private sector’s 5.6 per cent rise. Despite the slower pace, wage increases outpaced inflation, which stands at 2.6 per cent, marking the 22nd consecutive quarter of such growth.

The unemployment rate rose to 4.5 per cent from 4.4 per cent in the prior quarter. Meanwhile, job vacancies dropped by 42,000, leaving the total at 761,000, far below the peak of 1.3 million seen in early 2022. Figures from HM Revenue & Customs revealed a notable decline of 106,000 payrolled employees, amounting to a total of 30.3 million workers in April.

Economic inactivity, which measures those not working or seeking work, saw a slight improvement, falling to 21.4 per cent. Liz McKeown from the ONS described the broader labour market as showing signs of cooling, with decreasing vacancies and a decline in payroll figures pointing to a shifting economic landscape.

Economists have suggested that the recent rise in national insurance contributions for employers, amounting to £25 billion, may have dampened hiring intentions and accelerated job cuts, particularly in sectors like hospitality. Businesses are also adjusting wages to accommodate the rise in the national minimum wage by 6.7 per cent, which took effect in April.

These trends align with the Bank of England’s objective of controlling inflation. Although wage growth remains above levels consistent with the central bank’s 2 per cent inflation target, experts believe progress is being made. Members of the Bank’s Monetary Policy Committee have cautiously supported interest rate cuts but warned that persistent pay growth could delay further monetary easing.

Analysts predict the Bank of England will proceed with two additional 0.25 percentage point rate cuts this year, potentially reducing borrowing costs to 3.75 per cent. However, central bank officials have emphasised the importance of monitoring wage pressures and unemployment closely to determine the right course of action.

The ONS report highlighted a gradual increase in the ratio of unemployed individuals to job vacancies, now standing at 2.1 in March. This indicates a softening labour market, which may influence the Bank’s rate-setting decisions in the coming months. While substantial progress is being made, lingering questions over the economic trajectory and inflation expectations remain critical factors in determining future developments.