Spring 2025 has brought troubling signs for the UK labour market. According to the latest report from the Office for National Statistics (ONS), wage growth slowed in the first quarter of the year, while unemployment levels are beginning to climb steadily. These trends could have far-reaching implications for both household budgets and the country’s monetary policy.
Slowing Wage Growth: A Warning Sign
Between January and March 2025, average weekly earnings excluding bonuses increased by 5.6% year-on-year. Although this may seem like healthy growth at first glance, it marks a decline compared to the previous quarter, which saw a 5.9% increase.
This deceleration reflects a broader cooling of labour market activity. PAYE system data reveals that the UK lost around 47,000 jobs in March and a further 33,000 in April. These figures indicate that businesses are increasingly cutting back on personnel costs, driven by rising operating expenses.
Consumer-Facing Sectors Feel the Strain
The negative trends have hit retail and hospitality sectors particularly hard — industries traditionally sensitive to economic shifts. These sectors are among the first to feel the impact of increased labour costs and falling consumer demand. The recent hike in the minimum wage and employer National Insurance contributions, which came into effect last month, has only exacerbated the situation.
Experts argue that this is more than a seasonal fluctuation; it may represent a structural shift in employment dynamics. Unemployment in the UK has risen to 4.5%, the highest level in two years. Analysts warn this could be just the beginning of a deeper transformation in the labour market.
The Bank of England’s Balancing Act
Despite rising unemployment, wage growth remains elevated — a factor causing concern at the Bank of England. The central bank finds itself in a difficult position: on one hand, it faces pressure to lower interest rates to support the economy; on the other, high wage growth could fuel inflation.
In May, the Monetary Policy Committee (MPC) opted for a middle ground by cutting the base rate from 4.5% to 4.25%. Yet, opinions within the committee remain divided: two members pushed for a more aggressive cut to 4%, while another two preferred to leave rates unchanged.
Deputy Governor Clare Lombardelli emphasized that the current pace of wage growth is still incompatible with the Bank’s inflation target. However, she noted that wage growth is expected to ease later this year, partly due to a cooling demand for labour.
Risks and Expectations
Economists caution that persistent wage growth, despite broader economic weakening, may indicate prolonged inflationary pressure. This could leave the Bank of England in a bind, where any decision — whether to slow the economy further or risk higher inflation — carries its own consequences.
Additionally, rising unemployment and falling employment may erode consumer confidence and dampen domestic demand. This, in turn, could delay the broader economic recovery, especially in sectors that rely heavily on household spending.
Political and Social Repercussions
Amid growing economic uncertainty, the government will likely come under increasing pressure. The rise in the minimum wage, intended to support real incomes, has become an added financial burden for businesses and has likely contributed to job losses. This could prompt a reassessment of certain fiscal and labour policies.
Trade unions have already voiced concerns about deteriorating working conditions and the potential rise of insecure employment. Analysts predict a growing shift toward short-term contracts, freelance work, and other flexible employment models — a trend that may reshape the very structure of the UK labour market over the long term.
What Lies Ahead?
In the near term, the UK labour market is expected to remain under pressure. Unemployment could continue to rise over the coming months, particularly in vulnerable sectors. At the same time, slowing wage growth could make it easier for the Bank of England to control inflation — but only if inflationary pressures ease significantly.
According to analysts at Capital Economics, if inflation begins to fall steadily, the Bank may have room to continue cutting interest rates. However, if wage growth remains high despite falling employment, this may point to deeper structural issues than previously anticipated.
At present, the UK economy is at a crossroads where every decision requires a cautious approach. The combination of labour market weakness, rising unemployment, and inflation risks forms a delicate balance that demands coordinated action from both monetary authorities and the government.