UK Jobs Market Weakens as Unemployment Climbs and Pay Growth Cools Ahead of BoE Decision

Key Highlights

• UK unemployment rose to 5.1%, the highest since early 2021, while private-sector pay growth slowed sharply.
• Weak labour data strengthened expectations of a Bank of England interest rate cut amid near-stagnant economic growth.
• Economists warn that budget uncertainty and slowing momentum are weighing heavily on hiring and wage settlements.

Britain’s labour market showed clear signs of strain in the run-up to Chancellor Rachel Reeves’ annual budget, with unemployment rising to its highest level in nearly four years and private-sector pay growth weakening to its slowest pace since 2020, according to official data released on Tuesday.

The figures added to mounting expectations that the Bank of England will move to cut interest rates this week as policymakers grapple with a sluggish economy and easing wage pressures. Financial markets are now almost fully pricing in a quarter-point rate cut at Thursday’s policy meeting.

Unemployment Climbs to Post-Pandemic High

The Office for National Statistics (ONS) reported that the unemployment rate increased to 5.1% in the three months to October, the highest level since the period ending January 2021. The rise underscores growing pressure on employers as economic growth stalls and uncertainty clouds hiring decisions.

According to Reuters, the increase in joblessness follows months of softening economic data and comes after Britain’s economy unexpectedly shrank by 0.1% in the three months to October, reinforcing concerns that momentum has faded sharply heading into 2026.

Private-Sector Pay Growth Slows Sharply

Pay data showed even clearer signs of cooling pressure. Private-sector wage growth, excluding bonuses, slowed to 3.9%, down from 4.2% previously and marking its weakest pace since the end of 2020, the ONS said.

This measure is being closely watched by the Bank of England as an indicator of lingering inflation pressure in the economy.

Overall regular wage growth across the economy slowed to 4.6%, down slightly from a revised 4.7% in the previous quarter and its lowest level since April 2022. Economists surveyed by Reuters had expected a marginally weaker reading of 4.5%.

Public Sector Wages Buck the Trend

In contrast, public-sector wage growth accelerated sharply, rising to 7.6% from 6.6%, the fastest increase since records began in 2001. The ONS stated that this reflected wage settlements implemented earlier in the year, compared to 2024.

The divergence between public and private sector pay highlights uneven pressures across the labour market, with government-backed wage deals cushioning public workers while private firms tighten cost controls.

Payrolls Fall as Hiring Pullback Deepens

Further signs of labour market weakness came from payroll data compiled by the tax office. The number of payrolled employees fell by 38,000 in November, while a previously reported drop of 32,000 in October was revised to a decline of 22,000.

Many employers have blamed higher costs following Reeves’ decision to raise social security contributions in October 2024. Several businesses said hiring plans were scaled back in response, even before the latest budget introduced £26 billion ($35 billion) in tax increases, most of which were delayed or softened for employers.

Budget Uncertainty Weighs on Outlook

Jack Kennedy, a senior economist at jobs platform Indeed, said both budget uncertainty and a deeper loss of economic momentum were weighing on labour demand. He warned that planned increases in the minimum wage and expanded workers’ rights could pose further challenges in 2026, particularly in lower-paid sectors.

Job postings in those sectors are already down 9% year-on-year, Kennedy noted, adding to concerns that employment growth could remain subdued well into next year. Sterling briefly strengthened against the dollar and euro following the data release, while government bond prices were little changed, reflecting expectations that a rate cut is already priced in.

Investors now turn their attention to inflation data due Wednesday, which is expected to show consumer price growth easing slightly to 3.5% in November, well above the Bank of England’s target, but consistent with a cooling trend that could justify looser policy.