UK unemployment hits 4-year high as pay growth cools

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UK unemployment rose to a four-year high in the run-up to April’s steep increases in payroll taxes and the minimum wage as pay growth cooled, underlining the mounting strains in the labour market.

Employers cut the number of payrolled staff by 55,000 between March and April, the Office for National Statistics said on Tuesday, leaving headcount 0.4 per cent lower than in April 2024.

In a further sign of the of the slowing jobs market, the number of vacancies fell and the number of people claiming jobless benefit rose. Provisional figures for May, although likely to be revised upwards, showed a drop in payrolls of 115,000.

Businesses are grappling with the higher national insurance contributions introduced in chancellor Rachel Reeves’ October Budget and the rise in the minium wage. Both measures came into effect in April.

“The cooling in the UK jobs market is gathering pace,” analysts at ING noted. “Wage growth is slowing, too.”

Annual growth in average weekly wages, excluding bonuses, slowed to 5.2 per cent in the period, the ONS said. That was below analysts’ expectations of 5.3 per cent and down from 5.5 per cent in the three months to March. Growth in total earnings, including bonuses, was 5.3 per cent. 

Following the release of the data, traders increased bets that the Bank of England would now cut interest rates by a quarter point at its September meeting, compared with a previous expectation of November.

The pound fell 0.6 per cent to $1.346 while the two-year gilt yield, which is sensitive to interest rate expectations, dropped 0.06 percentage points to 3.95 per cent.

The BoE’s Monetary Policy Committee split three ways last month when it cut interest rates a quarter point to 4.25 per cent, with two officials voting for a bigger reduction and two opting to keep rates unchanged.

Economists said Tuesday’s data would reassure policymakers that underlying inflationary pressures in the economy were easing, despite a sharp pick-up in headline inflation in April.

“The jobs market is not collapsing . . . But most indicators show labour demand is clearly weakening,” said Ruth Gregory, at the consultancy Capital Economics.

The figures would not necessarily prompt a rate cut at the MPC’s next meeting but they supported the case to cut rates as low as 3.5 per cent over the next year, she added.

Rob Wood, at the consultancy Pantheon Macroeconomics, said the labour market “looks in worse shape in May” but cautioned that the payroll numbers could overstate the extent of weakness, as they did not include any count of self-employment.