Employers have scaled back on pay rises and hiring in recent months as the UK economy shows further signs of slowing.
Figures released by the Office for National Statistics (ONS) confirmed that unemployment increased in the three months to June. However, the official jobless rate was unchanged at 4.7%, a four-year high.
Average earnings growth, including bonuses, fell from 5% to 4.6% over the same period. However, regular pay growth held steady at 5% without bonuses, indicating that businesses have been cutting back primarily on one-off incentives rather than basic salary increases.
The number of job vacancies also declined, dropping by 44,000 between April and June. This marked the 37th consecutive quarterly fall, bringing the total number of available jobs to 718,000, well below pre-pandemic levels. According to the ONS, the data suggest that many firms are holding back from recruiting new staff or replacing employees who leave.
Government defends jobs record
During a visit to Belfast, Chancellor Rachel Reeves acknowledged that the Government still had “more to do” but defended its record since Labour came into office. She argued that overall employment had risen, citing an additional 384,000 people in work since she took the role of chancellor.
“The most important figure today is that there are 384,000 more people in work than when I became Chancellor,” Reeves said. “Everybody who can work should be in work, and as a Government, we’re committed to helping more people back to work. There are huge opportunities in our economy.”
Her remarks came just weeks after earlier figures showed unemployment had risen to 4.7% in the three months to May, with pay growth slipping from 5.3% to 5%.
Rising costs weigh on hiring
Business groups have pointed to higher employment costs as one of the key factors holding back recruitment. Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales (ICAEW), said April’s rise in employer national insurance contributions still affected firms.
“The UK jobs market is facing more pain in the coming months with higher labour costs likely to lift unemployment moderately higher, particularly given growing concerns over more tax rises in this autumn’s budget,” Thiru warned.
He also noted that the figures were consistent with the Bank of England’s expectation that the labour market and pay growth would gradually weaken. However, he suggested that the cooling pace was unlikely to convince the Bank to cut interest rates again in September, following last week’s quarter-point reduction to 4%.
“While these disheartening figures will reassure rate-setters that last week’s policy loosening was the right call, the pace at which the labour market is currently cooling is unlikely to be sufficient to prompt another rate cut in September,” he said.
Financial markets had broadly anticipated the latest results, with unemployment expected to hold steady at 4.7% and earnings growth projected to slow slightly from 5% to 4.7%.
The ONS data also highlighted differences between sectors. Finance and business services, where bonuses typically make up a larger pay share, reported the lowest annual growth in regular earnings at just 3.1%.
Recent business surveys reinforce the official picture, showing that employers have posted fewer new roles to deal with rising employment costs and uncertainty over the economic outlook.
With vacancies at their lowest level in years, pay growth weakening, and unemployment increasing, the figures suggest that workers and employers will face a more difficult environment in the second half of 2025.
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