UK unemployment hits near five-year high as hiring slows

The UK unemployment rate rose to a near five-year high in the final three months of 2025, underscoring mounting strains in the labour market as businesses slowed hiring in response to higher employment costs.

Official figures published by Office for National Statistics showed unemployment climbed to 5.2% in the three months to December, up from 5.1% in the period to November.

The increase came alongside a further fall in the number of people on company payrolls, reinforcing signs that firms are becoming more cautious.

The number of payrolled employees fell by 130,000 over the year and by 46,000 in the final quarter, the ONS said, extending a downward trend that began after the government’s 2024 Budget.

Budget impact weighs on employers

Businesses have repeatedly warned that higher employment costs are constraining hiring decisions.

Chancellor Rachel Reeves’s first Budget raised employer National Insurance contributions and increased the minimum wage, measures that the ONS said have contributed to “weak hiring activity”.

ONS director of economic statistics Liz McKeown said the labour market was showing signs of slackening.

“The number of workers on payroll fell further in the final quarter of the year, reflecting weak hiring activity, although it is largely unchanged in the latest month. Over the same period, the unemployment rate increased, with data showing that more people who were out of work are now actively looking for a job," she said.

Vacancy levels have remained broadly stable since mid-2025, but with unemployment rising, the number of jobseekers per vacancy has increased to a new post-pandemic high.

Redundancies are also trending upwards, the ONS said.

Pay growth slows despite public sector strength

Average annual pay growth across the economy stood at 4.2% in the final quarter, but the headline figure masked a widening divergence between sectors.

Public sector wages rose by 7.2%, while private sector pay increased by a more subdued 3.4%.

Underlying earnings momentum continued to cool.

Regular pay excluding bonuses rose by 4.2% in the October-to-December period, down from 4.4% previously, while total pay growth including bonuses slowed to 4.2% from 4.6%.

Once inflation is taken into account, pay growth looked notably weaker.

Real regular pay rose by just 0.8%, its lowest level since mid-2023.

“Private sector wage growth continues to slow and is at its lowest rate in five years,” McKeown said, noting that elevated public sector pay growth was still being influenced by earlier pay awards.

Youth unemployment emerges as pressure point

Economists say the impact of rising labour costs is falling unevenly, with younger workers facing particular challenges.

Peter Dixon, senior economist at National Institute of Economic and Social Research, said recent data suggest younger workers are increasingly being priced out of jobs.

A sharp rise in the minimum wage over the past two years has pushed unemployment among 18–24 year olds up by more than two percentage points to around 14%, Dixon said.

With another inflation-plus increase in the minimum wage for 18–20 year olds due in April, he warned that young people could continue to struggle to gain a foothold in the labour market in the near term.

Labour market ‘creaking’, investors say

Market participants and investors echoed concerns about the direction of the labour market's trajectory.

Jonathan Raymond, investment manager at Quilter Cheviot, said the latest data points to a labour market under strain.

“Following a November where hiring plans were put on hold due to the budget, things are yet to get going again, potentially highlighting the longer-term impacts of increased costs that businesses have faced," he said.

Raymond added that rising minimum wages, higher National Insurance contributions, and uncertainty around employment rights reforms were weighing on business confidence and had offset earlier signs of economic improvement.

"Economic indicators were beginning to shine some positivity but that has arguably been wiped by this latest data."

Rate cut expectations firm up

The weakening labour market has strengthened expectations that the Bank of England will begin cutting interest rates sooner rather than later.

Money markets are now pricing in around a 75% chance of a rate cut to 3.5% at the central bank’s March meeting, up from about 69% in the previous day.

Investors are also fully pricing in two rate cuts by the end of the year, which would bring the Bank Rate down to 3.25%.

James Smith, developed markets economist at ING, said the latest jobs report keeps the Bank of England “firmly on track” for a March cut.

While he noted that job losses have been concentrated in consumer-facing sectors such as hospitality, Smith said the broader economy still appeared more resilient, with redundancies rising only gradually and vacancy numbers stabilising.