The UK unemployment rate has climbed to 5.2 per cent, marking its highest level in almost five years, while wage growth has continued to cool.
The latest figures are fuelling expectations that the Bank of England could cut interest rates as early as the spring.
Data from the Office for National Statistics shows unemployment reached 5.2 per cent in the three months to December, up from 5.1 per cent in the previous quarter and the highest since early 2021. The rise was broadly in line with economists’ forecasts, but it underlines the steady deterioration in the labour market since 2022.
Young people are bearing the brunt of the slowdown. Unemployment among 18 to 24-year-olds rose to 14 per cent in the three months to December, the highest rate in five years, excluding pandemic distortions. Analysts warn that Britain risks slipping down international rankings for youth employment if hiring at entry level remains subdued.
Employers have cited rising labour costs as a key factor behind weaker recruitment. Increases in employer National Insurance contributions and the adult minimum wage, introduced in recent budgets by Chancellor Rachel Reeves, are said to have added pressure to payrolls. Some economists also point to rapid advances in artificial intelligence, with firms reassessing the need for junior roles.
Average pay excluding bonuses in Great Britain rose by 4.2 per cent in the three months to December, down from 4.4 per cent previously. Private sector pay growth slowed sharply to 3.4 per cent, its weakest pace in five years, while public sector wages increased by 7.2 per cent.
After adjusting for inflation, real annual pay growth excluding bonuses stood at just 0.8 per cent, the lowest since August 2023. Inflation measured 3.4 per cent in December, according to the ONS, and fresh data is due shortly.
The number of people on company payrolls fell by 134,000 compared with a year earlier and by 46,000 over the latest quarter. On a monthly basis, payrolls declined by 11,000 in January. Although an earlier sharp fall reported for December was revised upwards, the broader trend points to weakening demand for labour.
With wage growth moderating and employment softening, markets are increasingly pricing in further monetary easing. The Bank of England recently held rates at 3.75 per cent but has forecast unemployment will edge up to 5.3 per cent this year. It also expects wage growth to slow further as inflation gradually eases.
Economists suggest the combination of rising unemployment and cooling pay pressures strengthens the case for at least one or two interest rate cuts in 2026, with the possibility of a move as soon as March gaining traction.
The government has acknowledged ongoing challenges in the labour market. Ministers have pledged £1.5 billion to tackle youth unemployment and announced measures to expand apprenticeship opportunities, aiming to create 50,000 new placements.
However, with the UK unemployment rate at a five-year high and real wage growth under strain, the pressure is mounting on policymakers to restore confidence and stimulate sustainable job creation across the economy.