Unemployment creeps up as firms cut jobs following Reeves tax raid
The unemployment rate has crept up to 4.6 per cent from 4.5 per cent, official data has revealed, putting Chancellor Reeves’ ambition of growing the UK economy and getting people into work under threat.
It is the highest unemployment rate in three years, with the UK economy then recovering from the pandemic.
Figures released by the Office for National Statistics (ONS) are the last set of economics data Reeves will see before she delivers the Spending Review on Wednesday, a key event which will set out government spending plans over the next few years and aim to increase productivity across the UK.
The Office for National Statistics (ONS) also revealed the number of payrolled employees fell by 78,000 over the last quarter while wage growth hit 5.2 per cent in April, which is lower than expected and may seed hopes for more interest rate cuts to be made this year.
An early estimate also shows that the number of payrolled employees dropped by 109,000 in May and 274,000 on the year, which is much higher than market estimates although provisional figures may be volatile.
Average earnings including bonuses grew by 5.3 per cent in the same month.
“There continues to be weakening in the labour market, with the number of people on payroll falling notably,” said Liz McKeown, director of economic statistics at the ONS.
“Feedback from our vacancies survey suggests somes firms may be holding back from recruiting new workers or replacing people when they move on.”
Jack Kennedy, senior economist at Indeed said a “lower appetite” for hiring may have come as a result of higher employer costs coming into effect and hesitation over the government’s flagship Employment Rights Bill.
Capital Economics’ Ruth Gregory said new data suggested the Bank may cut interest rates more than investors expect over the next 12 months.
Fresh labour market figures will be taken with a pinch of salt by leading economists and policymakers given problems the ONS has faced over gathering data and calculating key metrics such as inflation.
It is expected to unveil its new labour force survey in 2027 after several delays.
Officials and City analysts have also questioned the credibility of the official stats body after its inflation data for April was wrong due to an error in vehicle excise duty calculations.
But easing pay growth may nevertheless ease nerves at the Bank of England, where several rate-setters including Governor Andrew Bailey have said its reduction was “crucial” for inflation to near the two per cent target.
Reeves’ taxes hit businesses
Data for April coincided with a month in which higher employers’ national insurance contributions came into effect, energy bills spiked and water bills rose, putting pressure on firms’ profit margins.
Several surveys have suggested that the cumulative effects of these changes, along with fears of President Trump’s tariffs being announced, would have made firms re-evaluate costs and shed staff as a result.
Bank of England officials will remain cautious about potential “second-round effects” coming through in data in the coming months, which represent higher inflation figures pushing up wage growth and vice-versa.
Deputy director of public policy at the British Chambers of Commerce Jane Gratton said a fall in vacancies showed high wage growth put extra cost pressures on businesses.
“Employment costs and pervasive skills shortages are a massive challenge for business, presenting big risks to investment and growth,” Gratton said.
In a hearing at the Treasury Select Committee last week, policymakers agreed that the UK was on a disinflationary path, with recent data showing a bounce back up to 3.4 per cent year-on-year consumer price index (CPI) inflation.
Markets are only pricing in two further interest rate cuts this year, which are likely to be made in August and November.
The Bank of England’s Monetary Policy Committee (MPC) is set to make a new decision later this month.
A report to be published alongside the decision will likely take a view on development of President Trump’s trade policies and the UK’s economic outlook after the Spending Review, during which Reeves will draw out plans for investment in AI technology and public infrastructure.