UK unemployment rises as hiring slows and wage growth eases

UK unemployment climbed to its highest level since May 2021 as hiring weakened and wage growth lost momentum, signalling a softening labour market ahead of next month’s budget.

The data, released on Tuesday by the Office for National Statistics (ONS), showed that employers are stabilising after months of job cuts triggered by a payroll tax hike earlier this year.

The figures suggest that the Bank of England may have to consider rate adjustments in 2026.

Labour market loosens as unemployment reaches 4.8%

The UK jobless rate increased to 4.8% in the three months through August.

It marks the highest level since May 2021, when the economy was still recovering from pandemic restrictions.

Source: Office for National Statistics

Economists had expected the figure to remain unchanged, underscoring the impact of a slower economy and tighter corporate budgets.

At the same time, private-sector wage growth dropped to 4.4%, its weakest since late 2021 and below the 4.5% market forecast.

Total pay, excluding bonuses, eased to 4.7% from 4.8%.

Public-sector pay growth, however, edged up due to backdated settlements for government workers, widening the gap between the two sectors.

The moderation in wages will be closely watched by the Bank of England, which has kept borrowing costs steady in recent months.

Although inflation remains almost double the 2% target, the data points to easing pressure on employers to raise pay further, reducing the risk of a wage-price spiral.

Job cuts slow after earlier tax shock

The labour market appears to be past the worst of the shake-out caused by April’s £26 billion ($34.7 billion) payroll tax increase.

The number of employees on payrolls fell by 10,000 in September after a revised gain of 10,000 in August, aligning with economists’ expectations.

Earlier this year, job losses had been much steeper as firms adjusted to higher costs from new tax and minimum-wage rules.

Revised ONS figures show that since Chancellor Rachel Reeves’ tax-heavy budget last October, total job losses stand at 127,000 — far fewer than previously thought.

The smaller-than-expected decline suggests employers are holding on to staff even as hiring activity cools.

Vacancies fell by 9,000 in the three months through September to 717,000, their slowest pace of decline this year.

This follows a drop of 57,000 in the June period.

Traders raise bets on rate cuts next year

Financial markets reacted swiftly to the latest data. The pound slipped as traders increased bets that the Bank of England will deliver rate cuts in 2026, with some now expecting borrowing costs to reach 3.5% by summer.

While policymakers have ruled out further cuts this year, the gradual cooling in wages and hiring could strengthen the case for easing monetary policy next spring.

Bank of England Governor Andrew Bailey, who has maintained a cautious tone in recent months, is expected to speak later on Tuesday in Washington.

His remarks will be closely scrutinised as investors seek clues on how the central bank plans to balance disinflation with slowing growth.

The Monetary Policy Committee remains divided. Some members have warned that high wages could feed into prices, while others view the slowdown in pay growth as evidence that disinflation remains intact.