UK unemployment has climbed to its highest level in five years while wage growth continued to ease, strengthening expectations that the Bank of England will resume cutting interest rates in the coming months.
Official figures from the Office for National Statistics show the jobless rate rose to 5.2 per cent in the three months to December, up from 5.1 per cent in the previous rolling quarter. Unemployment has been edging higher since 2022, reflecting a steady cooling in the labour market.
At the same time, average earnings excluding bonuses increased by 4.2 per cent year-on-year, down from 4.5 per cent in November and in line with economists’ forecasts.
The slowdown comes against a backdrop of higher labour costs following the chancellor’s £25bn rise in employer national insurance contributions introduced in October 2024, alongside increases in the national living wage.
Younger workers appear to be disproportionately affected. Payroll data show that employment among those aged 34 and under has fallen by 242,000 since mid-2024, when overall payroll numbers peaked. By contrast, employment among workers aged 35 and over has risen by 71,000.
Martin Beck, chief economist at WPI Strategy, said higher labour costs were weighing most heavily on entry-level hiring. “At the same time, firms are likely reassessing junior roles in the face of rapid advances in AI,” he added.
The softening labour market has reinforced market bets that the Bank of England will cut rates from their current level of 3.75 per cent. According to Bloomberg data, traders are now pricing in a roughly 76 per cent chance of a rate reduction at the next meeting in March.
Paul Dales, chief UK economist at Capital Economics, said the data supported the view that policymakers have “at least a couple more interest rate cuts in their locker”, with the probability of a March move increasing.
At its most recent meeting, the Bank’s monetary policy committee voted 5–4 to hold rates steady, a closer split than anticipated by analysts. Governor Andrew Bailey has since indicated that further policy loosening remains possible this year.
Yael Selfin, chief economist at KPMG, said the latest figures would reassure rate-setters that pay pressures are easing. “The MPC will take comfort from evidence that the labour market continues to soften,” she said.
Wednesday’s inflation figures will be closely watched. Economists expect the consumer prices index to fall to 3 per cent in January, down from 3.4 per cent in December, driven by lower airfares, easing food prices and slower energy inflation. That would mark the lowest reading since March 2025.
Stephen Kinnock, a health minister, pointed to recent job creation and economic growth, saying the UK had delivered the strongest growth among G7 European economies last year. He added that government initiatives were under way to support employment and apprenticeships.
However, business groups argue that recent employment reforms have made hiring more costly and risky. Alex Hall-Chen of the Institute of Directors said unemployment reaching 5.2 per cent underlined the fragility of the jobs market.
“The best way to boost employment is to make it less risky and less costly for businesses to hire staff,” she said, calling for adjustments to the Employment Rights Act and exemptions for small and medium-sized enterprises.
Jonathan Moyes, head of investment research at Wealth Club, said the alignment of weaker job growth and moderating wages could shift the Bank’s stance. “Wage growth has been the last domino holding back rate cuts,” he said. “Now both employment and wages are weakening, the case for further easing strengthens.”
For policymakers, the message from the data is clear: the labour market is losing momentum, and the balance of risks may now tilt towards supporting growth rather than restraining inflation.
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UK unemployment hits five-year high as wage growth cools
