Unemployment Rises Despite Positive Signs in Hiring Market

The UK job market has reached a concerning milestone as unemployment has climbed to a near five-year high of 5.1 percent. This comes as recent figures suggest that the initial signs of an encouraging start to 2026 may not be enough to offset the adverse trends affecting employment. The Recruitment and Employment Confederation, alongside KPMG, released data indicating that the sharp decline in hiring might have bottomed out, yet the overall labour market remains subdued.

The index measuring permanent staff hiring increased to 46.9 in January from 44.3 in the previous month. This reading, while the highest in 18 months, is still below the 50-point threshold that separates growth from contraction. Companies are reportedly beginning to lift hiring freezes due to reduced market uncertainty following the recent budget announcements.

Despite these glimmers of hope, the services sector has experienced continuous job losses since October 2024, marking the longest period of such declines in 16 years. These figures highlight the challenges that continue to beset employers, particularly those grappling with rising costs associated with increased employer National Insurance contributions.

Although the Bank of England suggests that the impact of higher employment taxes will diminish over time, the financial landscape remains fragile. Predictions indicate that unemployment may peak at 5.3 percent this year, levels not seen since the height of the Covid-19 pandemic. This reality poses challenges for businesses, which are now in a ‘low-hire, low-fire’ mode.

Job vacancies for full-time positions have decreased for 27 consecutive months, leading to a cautious approach amongst employers. The increase in payroll costs has contributed to this hesitation, with businesses preferring to maintain their current staff rather than engage in new hiring. As the economic outlook remains cloudy, the labour market struggles to gain momentum.

As we move further into 2026, the focus will centre on how businesses respond to the evolving economic circumstances, and whether optimism regarding hiring will translate into tangible changes in employment levels.