Unemployment in the UK has increased to 5.2%, the highest rate in nearly five years, with slowing wage growth suggesting a potential interest rate cut in spring.

The Office for National Statistics (ONS) reported this rate for the three months ending December, consistent with economists' predictions and up from 5.1% in the prior quarter.

Labour Costs Drive UK Unemployment Up

Rachel Reeves' tax increases, especially those related to national insurance contributions and minimum wage hikes, have been cited by businesses as contributing to the rise in unemployment in the UK since 2022.

According to economists, younger workers are particularly affected, with unemployment among those aged 18 to 24 hitting 14% in the last quarter of 2025—the highest level in five years—raising questions about the UK's youth employment ranking internationally.

Martin Beck, chief economist at WPI Strategy, noted that increased labour costs from last year's employer NICs and adult minimum wage hikes are significantly impacting entry-level hiring. Additionally, firms may be reevaluating junior positions due to swift advancements in AI.

In Great Britain, wages excluding bonuses rose by 4.2% in the three months leading to December, a slight decrease from 4.4% the prior month.

In the private sector, pay increased by 3.4%, a five-year low, while public sector wages rose by 7.2%. Adjusted for inflation, annual pay excluding bonuses rose by only 0.8% from October to December, marking the lowest rate since August 2023.

Pay Growth Weakens as Layoffs Rise

According to Suren Thiru, director of economics at the Institute of Chartered Accountants in England and Wales, this slackening in pay growth is expected to increase due to rising layoffs and higher employment costs, which are diminishing workers’ bargaining power.

The latest payroll data indicates a decrease of 134,000 individuals from the previous year and a quarterly drop of 46,000. In January, payrolls fell by 11,000, although the earlier report for December compared with November was revised from a 43,000 decline to only 6,000.

The Bank of England (BOE) is expected to lower interest rates by spring as inflationary pressures, including wage growth, seem to be diminishing.

Furthermore, the Bank projects an increase in the unemployment rate to 5.3% this year, with wage growth expected to decrease from 3.4% to 3.25% as inflation declines. At its recent meeting, the Bank maintained interest rates at 3.75%.

Weak Job Data Fuels Fears of BOE Cuts

Paul Dales, chief UK economist at Capital Economics, indicates that the absence of recovery signs in the labour market and declining wage growth suggest that the Bank of England may implement additional interest rate cuts, likely starting in March.

Inflation, which gauges the rate of price increases, increased from 3.2% to 3.4% in December. Data for January will be made public by the ONS on Wednesday.

Notably, Pat McFadden, the work and pensions secretary, emphasised the need for further action to reduce unemployment. He highlighted a £1.5 billion initiative aimed at tackling youth unemployment, which includes new measures to facilitate the discovery and acquisition of apprenticeships, alongside creating 50,000 new apprenticeship opportunities.

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