UK unemployment has risen to its highest level since the 2021 lockdown, while wage growth has cooled to its weakest pace in more than three years, according to the latest data from the Office for National Statistics (ONS).
The figures, released on Tuesday, show the unemployment rate increased to 4.8% in the three months to August, up from 4.7% in the previous quarter — the highest reading since the three months to May 2021. A single-month estimate put joblessness even higher, at 5.3%, marking the steepest rise since October 2020.
At the same time, regular pay (excluding bonuses) rose by 4.7%, its slowest pace since early 2022, while total pay growth (including bonuses) edged up slightly to 5%. The ONS said that while earnings growth remains well above pre-pandemic norms, momentum has clearly weakened in recent months.
The combination of higher unemployment and softer pay growth will provide some comfort to policymakers at the Bank of England, who have been concerned that wage pressures are fuelling persistent inflation.
Inflation has remained stuck at 3.8% for two consecutive months and is expected to rise to around 4% in September, still nearly double the Bank’s 2% target.
Economists said the latest labour market data could strengthen the case for interest rate cuts in 2026, as hiring slows and pay settlements ease.
“We think it’s only a matter of time before the loosening in the labour market leads to a more marked easing in wage growth,” said Ashley Webb, UK economist at Capital Economics. “That would allow the Bank to cut rates from 4% now to around 3% next year.”
Younger workers hit hardest as vacancies fall
According to the ONS, the increase in unemployment was driven primarily by younger workers, while the number of over-65s in work hit a record high.
“After a long period of weak hiring activity, there are signs that the falls we’ve seen in both payroll numbers and vacancies are now levelling off,” said Liz McKeown, director of economic statistics at the ONS. “We’re seeing different patterns across age ranges, with record numbers of older people in work, but more young people out of work.”
The total number of job vacancies slipped by 9,000 to 717,000, the lowest level since 2021. Meanwhile, the number of payrolled employees fell by 10,000 in September and is now down by 126,000 compared with October 2024 — shortly after the government announced £40 billion in tax rises.
Economists said the rise in employers’ National Insurance contributions (NICs) and last year’s 6.7% increase in the minimum wage have added to cost pressures for employers, contributing to the slowdown in hiring.
“The increase in employers’ NICs and the minimum wage have clearly weighed on hiring,” said Martin Beck, chief economist at WPI Strategy. “Figures over the summer suggest the worst of the damage is passing, but the overall trend is one of stagnation.”
The private sector saw wage growth slow to 4.4%, the weakest in nearly four years, while public sector pay rose faster, reflecting several delayed settlements from 2024.
The ONS also noted that August recorded the fewest working days lost to strikes in almost six years, signalling easing industrial tensions across the economy.
The data underscores the delicate economic backdrop facing Chancellor Rachel Reeves as she prepares her November 26 Budget, which is expected to include tens of billions of pounds in tax rises to restore fiscal balance.
The pound weakened by 0.4% following the release, trading at $1.32 against the dollar and €1.14 against the euro. UK government bond yields slipped slightly, with the 10-year gilt yield down by two basis points to 4.65%.
Pat McFadden, the pensions secretary, said the figures showed “record numbers of people in work and looking for work” but admitted “too many people remain locked out of employment or training.”
Analysts said the overall message was clear: the labour market is cooling, and while that may help tame inflation, it also highlights the fragility of the UK’s post-pandemic recovery.
