Wage growth in the UK has dropped to its lowest level in more than five years, as younger workers face increasing challenges in a slowing labour market, according to the latest data from the Office for National Statistics.
Average earnings growth fell to 3.8% in the three months to January, down from 4.2% in the previous period and below expectations from economists. The decline marks the weakest pace of wage growth since early 2021, signalling a cooling jobs market.
The unemployment rate remained unchanged at 5.2%, while job vacancies showed little movement. The number of people entering the workforce rose slightly, but not enough to offset broader signs of weakness.
Younger workers have been hit hardest by the slowdown. Unemployment among those aged 18 to 24 has reached its highest level since 2015, with nearly 600,000 young people currently out of work and actively seeking employment.
Martin Beck, chief economist at WPI Strategy, said the divide between age groups is becoming more pronounced. Employment among workers aged 34 and under has fallen sharply since mid-2024, dropping by almost 220,000, while employment for those aged 35 and over has increased by around 110,000. This trend suggests employers are scaling back entry-level hiring more aggressively.
The Chartered Institute of Personnel and Development described the rise in youth unemployment as a significant loss of potential, warning that long-term consequences could follow if opportunities do not improve.
The figures also highlighted a slowdown in public sector pay growth as a key factor behind the overall decline in wages. Previous pay settlements, which included bonuses to offset high inflation, are now dropping out of the annual calculations, reducing the headline growth rate.
Regular earnings growth stood at 5.9% in the public sector and 3.3% in the private sector over the period.
Despite the slowdown in wages, the Bank of England is expected to hold interest rates at 3.75% at its latest meeting. Policymakers remain cautious due to geopolitical tensions in the Middle East and rising oil prices, which could push inflation higher.
Economists say the central bank faces a difficult balancing act. Slower wage growth may help ease inflationary pressures, but rising energy costs could offset that benefit.
Peter Dixon, senior economist at the National Institute of Economic and Social Research, said the weakening labour market adds to the Bank’s challenges. He noted that while there are risks of higher wages driven by rising living costs, overall economic fragility and the growing impact of artificial intelligence are likely to keep pay growth subdued.
Jake Finney, senior economist at PwC UK, added that weaker labour market conditions make further interest rate increases less likely. However, he said cuts are also unlikely in the near term unless global tensions begin to ease.
In the United States, the Federal Reserve has also held interest rates steady at between 3.5% and 3.75%, resisting political pressure to cut borrowing costs.