Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm..
The UK labour market has shown worrying signs of loosening, with unemployment jumping to 5% in the three months to September — the highest rate since May 2021. Job vacancies remained largely static at 723,000, a 12% decrease from 822,000 in the same period in 2024, while the number of people in employment declined, particularly across retail, construction, and professional services.
It is clear that businesses are in ultra-cautious mode driven by uncertainty — uncertainty ahead of the Budget, ahead of the Employment Rights Bill, and around the future of work in an AI-driven world.
For the government, the timing is awkward. The figures land just two weeks before the Autumn Budget, and they sharpen the fiscal dilemma facing the Chancellor. The softening labour data will amplify calls for measures that support job creation, retraining, and business investment to prevent the slowdown from deepening.
One option is to turbocharge the hospitality and retail industries through targeted government support. Increases in the minimum wage and employer NICs, along with the reduction of business rates relief from 75% to 40%, have presented significant challenges for these industries. Given their capacity to employ large numbers of young and low-skilled workers, these sectors can respond rapidly to labour market demands, providing an immediate stimulus to employment levels. The government would be wise to revitalise the industry as job vacancies continue to fall.
The labour market, once a symbol of post-pandemic resilience, is now flashing early warning lights — a signal the Treasury cannot afford to ignore.
Average earnings excluding bonuses — a key measure of underlying wage pressure — rose 4.6% year-on-year, down slightly from 4.7% previously. While this still represents solid growth in cash terms, it lags behind inflation in many essential spending categories, meaning most households continue to feel a squeeze on real disposable incomes.
"For the Bank of England, the easing in wage growth offers some comfort. Slower pay rises reduce the risk of second-round inflation effects and could strengthen the case for an interest-rate cut in December – just in time for Christmas!"
