Labour market remarkably resilient but unemployment to reach 5% by 2026
Professor Joe Nellis May 13th 2025
The UK labour market continues to be tight, reflected by a period of relatively low unemployment and consistently high earnings growth — an earnings growth figure of 5.6% means that wage rises stay considerably above inflation as demand for labour pushes wages up. As a driver of inflation, this persistent high wage growth is something that the Bank of England has their eye on. If it continues, it will be a sore spot for an already divided Monetary Policy Committee as it explores further interest rates cuts this year.
Nonetheless, the market is likely to shift under increased pressures as the year progresses. Job vacancies have been decreasing since mid-2022 and have once again fallen for the quarter February to April 2025 — compared to February to April 2024, there are 131,000 (14.7%) less vacancies in the UK.
This is compounded by the impact of rising employment costs — rise in employer NICs and the National Living Wage — and ongoing trade uncertainty, which will both apply a downwards push on business confidence and recruitment. The Prime Minister may have won some small tariff victories on specific goods, but we are certainly not out of the woods when it comes to protecting UK exports.
Labour market outlook
"With these increased pressures on the labour market, we will finally begin to see some movement in unemployment, although not in a positive direction. As increased costs bear down on employers, jobs may be lost and recruitment will slow, and unemployment will lurch upwards towards 5%. Unemployment was last at 5% in April 2021 as we emerged from lockdown, but we are likely to reach this figure again by the end of the year."
