UK labour market weakens as hiring and pay growth cools
The UK labour market continued to lose momentum at the start of 2026, with falling employment, weak hiring demand and easing wage growth reinforcing signs of a sustained slowdown.
BDO’s Employment Index fell for a third consecutive month in January to 93.30, its lowest level since March 2011, as businesses pulled back on recruitment amid persistent cost pressures.
The decline comes alongside a continued drop in payroll numbers.
HMRC data shows 43,000 fewer payrolled employees in December, marking the fourth consecutive monthly fall and the sharpest decline since late 2020.
Meanwhile, ONS figures indicate payrolled employment fell 0.6 per cent over 2025, with losses concentrated in retail, hospitality and lower-paid sectors.
Elsewhere, hiring demand across the country remains subdued, with vacancies sitting at levels last seen in early 2021.
Meanwhile, job postings are now around 26 per cent below their pre-pandemic numbers, according to Indeed, making the UK the only major advanced economy where postings remain below 2020 levels.
Wage growth eases as unemployment soars
What’s more, the weakening labour market is now feeding through into pay.
Annual posted wage growth slowed to 4.3 per cent in December, its lowest rate since early 2022, as it tumbles from 5.7 per cent three months earlier.
Official data shows private sector earnings growth easing to 3.9 per cent, the weakest reading in almost five years.
Despite the slowdown, redundancy notifications remain low, showing that firms are cutting back on hiring rather than resorting to large-scale layoffs.
The ratio of unemployed people to vacancies has risen to 2.5, up from a low of one in 2022 and above pre-pandemic norms.
And there have been limited signs of improvement in business activity.
BDO’s Output Index rose to 99.70, its highest level in over a year, while the Optimism Index edged marginally higher from a four-year low in December.
But, analysis by CEBR for BDO attributed the uptick to short-term clarity following the Budget and stronger overseas demand, rather than a shift in growth conditions.
Scott Knight, head of growth at BDO, said: “What we’re seeing here is a low-hire, low-fire labour market. Businesses are holding on to staff where they can, but they are reluctant to hire or invest while underlying conditions remain weak.”
The data adds to the challenge facing the Bank of England, which is weighing signs of easing wage pressure against weak growth and rising unemployment.
Policymakers have warned the jobless rate could climb to 5.3 per cent this year, while GDP growth is forecast at just 0.9 per cent, increasing pressure for further interest rate cuts later in 2026.