UK unemployment rate stalls at 4.9 percent as private sector wage growth hits six-year low

The United Kingdom’s unemployment rate failed to decline as anticipated, remaining fixed at 4.9 percent for the three months ending in June. This outcome represents a setback for the government’s economic strategy, as economists had previously forecast a reduction to 4.8 percent. According to data released by the Office for National Statistics, the number of employees on payroll also decreased by 13,000 during the period. While the three-month average showed no change, monthly data indicated a sharp deterioration at the end of the quarter, with the unemployment rate jumping to 5.4 percent in June from 4.6 percent in May. This single-month increase marks the highest reading since October 2020 and constitutes the largest monthly jump in 13 years.

The stagnation in the labour market coincides with a significant slowdown in private sector wage growth, which fell to a six-year low of 2.8 percent. This figure stands in stark contrast to the public sector, where average pay increased by 6.1 percent over the same period. Julian Jessop of the Institute of Economic Affairs described the latest jobs figures as dire, noting that the unemployment rate remains stubbornly high. He attributed the weakness in the labour market to the rising cost of employment, citing higher employer National Insurance contributions, an increased minimum wage, and an expanding regulatory burden. Jessop argued that businesses are responding by hiring fewer people, cutting vacancies, and suppressing wages, and he urged ministers to focus on reducing the cost of hiring rather than increasing taxation and regulation.

Vacancies have continued to decline, dropping to 707,000 in the three months to July, the lowest level since 2021. Ben Harrison, director of the Work Foundation at Lancaster University, warned that the UK is trapped in a deepening jobs drought. He highlighted that the decline in starter jobs has been 1.6 times faster than for other vacancies, making it increasingly difficult for young people to secure their first foothold in the workforce. Youth unemployment, while slightly lower in the latest quarter, remains near an 11-year high and is firmly above the peak seen during the 2020 lockdowns. Research conducted for a government review on youth worklessness indicated that only 5 percent of UK adults believe success is based on talent, with many citing nepotism or hard work as more significant factors.

The divergence between public and private sector pay has raised concerns about inflationary pressures. Professor Costas Milas of the University of Liverpool warned that above-inflation public pay increases risk triggering a wage-price spiral, adding to inflationary pressures. He noted that Bank of England models do not differentiate between public and private wages, which could complicate monetary policy decisions. Meanwhile, Thomas Pugh, chief economist at RSM UK, stated that stagnant or negative real wage growth in the second half of the year would intensify pressure on the government to support the cost of living. However, he noted that implementing substantial measures without breaching fiscal rules or manifesto commitments appears increasingly difficult given the deterioration in fiscal headroom and commitments to spend on defence and social care.

Despite the cooling labour market, preliminary data suggests that productivity has improved. Output per hour and output per worker were 0.7 percent and 1.4 percent higher respectively in the second quarter compared with the same time last year. The Bank of England has estimated that inflation will rise to 3.2 percent by the end of the year as rising energy prices filter through the economy. The latest unemployment and pay growth figures are likely to encourage the central bank to keep interest rates on hold, as the slowdown in private sector pay growth offers some relief from inflationary pressure, even as the government faces challenges from the rising cost of living and the Iran war.