The UK labour market is showing further signs of weakness, with new data revealing a slowdown in pay growth, rising redundancies, and falling job vacancies.
Figures from the Office for National Statistics (ONS) show annual growth in regular earnings, excluding bonuses, slowed to 4.8% in the three months to July, down from 5% in the previous three months. The slowdown matched forecasts from City economists.
Unemployment remained at 4.7% in July, unchanged from the previous month but the highest level in four years. This was up from 4.6% in the previous quarter, reflecting reduced hiring and a rise in unemployment-related benefit claims.
ONS director of economic statistics Liz McKeown said: “The labour market continues to cool, with the number of people on payroll falling again, while firms also told us there were fewer jobs in the latest period.”
Despite slowing, wage growth is still strong by historic standards. Average earnings including bonuses grew by 4.7% in the three months to July, the figure used to calculate the pensions triple lock. This means pensioners could see a significant boost in April, with the full new state pension rising from £230.25 a week to £241.05. Those on the basic state pension would see weekly payments increase from £176.45 to £184.75.
Labour has pledged to keep the triple lock, which guarantees annual pension increases in line with inflation, earnings, or 2.5% – whichever is higher.
The economic backdrop is challenging for Chancellor Rachel Reeves, who faces growing pressure to strengthen the economy before her 26 November budget. Critics argue that Labour’s £25bn rise in employer national insurance contributions and a 6.7% increase in the national living wage have added costs for businesses, forcing some to cut jobs and raise consumer prices.
The ONS’s labour force survey, on which much of the data is based, has faced criticism over falling response rates, with some experts warning that policymakers may be “flying blind.” Still, HMRC figures support the view of a cooling market, with the number of workers on company payrolls falling by 8,000 compared with June. Early estimates show 127,000 fewer payrolled employees than a year earlier.
Suren Thiru, economic director at the Institute of Chartered Accountants in England and Wales, said: “These figures suggest that the UK’s jobs market is wilting under the weight of a stagnating economy and skyrocketing staffing costs as more businesses aim to shrink their workforce in response to these twin headwinds.”
Real wage growth, adjusted for inflation, slowed to 1.2% in the three months to July, down from 1.5%.
The Bank of England faces a dilemma as it balances inflation risks with the cooling jobs market. Strong wage growth has kept inflationary pressures elevated, limiting scope for interest rate cuts. Analysts expect the Bank to hold its base rate at 4% this week, with markets predicting cuts will not begin until spring 2026.
Meanwhile, the UK’s headline inflation rate for August is expected to remain unchanged at 3.8%, almost double the Bank’s 2% target.
Liberal Democrat Treasury spokesperson Daisy Cooper accused Labour of “self sabotage,” saying: “[It has put] even more pressure on already stretched public services and leaving businesses scrambling just to keep the lights on.”
