Britain’s unemployment rate remains stubbornly high at 4.7 per cent, matching a four-year peak, as cooling wage growth and falling job vacancies signal a weakening labour market that could force Chancellor Rachel Reeves into further tax rises at November’s crucial Autumn Budget.
The Office for National Statistics confirmed on Monday that unemployment held steady at 4.7 per cent in the three months to July, unchanged from the previous quarter but marking the highest level since June 2021. The persistent joblessness comes despite average regular earnings growth falling to 4.8 per cent, down from above 5 per cent for the first time in three years.
Liz McKeown, director of economic statistics at the ONS, painted a picture of a labour market losing momentum. “The labour market continues to cool, with the number of people on payroll falling again, while firms also told us there were fewer jobs in the latest period,” she said. The director noted that “the weakness is reflected in a slight increase on the quarter in the unemployment rate” with vacancies continuing their downward trajectory, though “the rate of decline appears to be slowing.”
Wage Growth Concerns Complicate Interest Rate Outlook
Despite the cooling, average weekly earnings remain elevated at levels that concern policymakers at the Bank of England, who are meeting on Thursday to decide whether to maintain interest rates at their current 4 per cent level. The central bank cut rates from 4.25 per cent in August by a narrow 5-4 vote, but persistent wage pressures could delay further reductions.
Professor Joe Nellis, economic adviser at accountancy firm MHA, warned that the current wage growth figures remain “higher than the Bank of England would like.” He explained: “Wages are continuing to rise despite vacancy numbers continuing to edge lower. After declining for three years, it was expected that vacancies would bottom out at pre-pandemic levels, but they are continuing to drop below this level.”
The stubborn wage growth threatens to keep services inflation elevated for longer, potentially forcing the Monetary Policy Committee into what Nellis described as “a holding pattern on interest rates.” With inflation currently running at 3.6 per cent and expected to peak at 4 per cent in September, the Bank faces a delicate balancing act between supporting growth and controlling price pressures.
“The MPC is expected to keep rates unchanged on Thursday, waiting for clearer signs that inflation is on a sustained path back to two per cent and wage growth is under control,” Nellis added. Markets currently price in a 55 per cent chance of another rate cut at September’s meeting, though economists increasingly expect rates to remain on hold until spring 2025.
Real Wages Barely Growing Despite Headlines
While nominal wage growth appears robust at 4.8 per cent, the reality for workers is far grimmer when inflation is factored in. Real wage growth stood at just 1.2 per cent after adjusting for Consumer Prices Index inflation, offering little relief to households still grappling with the cost-of-living crisis.
Ben Harrison, director at the Work Foundation at Lancaster University, highlighted the disconnect between headline wage figures and workers’ actual experiences. “Worryingly, this period of consistent pay growth has not fed through to real wages. Workers remain only £24 better off since the start of the Financial Crisis in August 2008,” he said.
The situation is particularly acute for jobseekers, with Harrison noting that there are now 2.3 jobseekers per vacancy, up sharply from recent years. “The risk remains that unemployment rises further in the months ahead,” he warned, adding that nominal wage growth’s dip below 5 per cent for the first time since June 2022 signals weakening worker bargaining power.
Autumn Budget Pressures Mount
The deteriorating labour market data arrives at a critical juncture for Chancellor Rachel Reeves, who must deliver her Autumn Budget on 26 November amid mounting fiscal pressures. With unemployment high and wage growth cooling, tax receipts could fall short of Treasury projections, potentially blowing a multi-billion pound hole in the public finances.
Kevin Brown, savings expert at Scottish Friendly, warned that “cooling wage growth shows that the labour market slowdown is now feeding through to workers’ pay packets, leaving them less protected against stubbornly high inflation.” He added: “For many households, weaker earnings growth results in tighter budgets and a hit to consumer confidence at a time when concerns are mounting over jobs and growth.”
The Chancellor faces what Professor Nellis described as “a delicate balancing act” between loosening fiscal policy to support growth or maintaining restraint to avoid stoking inflation further. Having already announced £40 billion of tax rises in last year’s budget, Reeves has ruled out increases to income tax, National Insurance, or VAT, leaving her with limited options.
Speculation is mounting that the Chancellor may target capital gains tax, inheritance tax, or property levies to raise additional revenue. The Treasury is reportedly exploring various options, though insiders suggest a wealth tax has been privately ruled out despite pressure from left-wing Labour MPs.
Workers’ Struggles Deepen
The human cost of the economic slowdown is becoming increasingly apparent. Harrison revealed that only half of workers, 48 per cent, believe wage increases are keeping up with the cost of living, whilst just 43 per cent expect an above-inflation pay rise in the next twelve months.
“As the potential for tax rises looms at the upcoming Autumn Budget, Government must ensure it does not increase the pressure on lower income workers who have borne the brunt of this squeeze in recent years,” Harrison urged, warning that any fiscal measures must protect the most vulnerable.
The cooling labour market has particularly affected younger workers, with unemployment amongst 16-to-24-year-olds rising to 14.1 per cent, up from 13.4 per cent a year earlier. This represents approximately 634,000 young people without work, an increase of 59,000 over the past year.
Economic Growth Concerns Intensify
The combination of rising unemployment, cooling wage growth, and persistent inflation threatens to derail the government’s growth agenda. Kevin Brown warned that “dampened consumer spending will almost certainly mean more sluggish growth” at a time when the economy is already showing signs of strain.
“Theoretically, softer wage data strengthens the case for another round of rate cuts but in practice, interest rates are likely to be on hold until at least spring next year,” Brown added, suggesting monetary policy alone cannot solve Britain’s economic challenges.
The data also reveals significant regional disparities, with London recording the highest unemployment rate at 6.2 per cent whilst Northern Ireland enjoyed the lowest at just 1.6 per cent. Economic inactivity, measuring those neither working nor seeking work, fell slightly to 21.1 per cent but remains elevated compared to pre-pandemic levels.
Business Confidence Wavers
For employers, the combination of persistent wage pressures and weakening demand presents a challenging environment. The number of job vacancies fell by 10,000 in the three months to August, marking the 38th consecutive quarterly decline. Nine of eighteen industry sectors saw vacancy numbers drop, suggesting broad-based weakness across the economy.
The forthcoming increase in employers’ National Insurance contributions, rising from 13.8 per cent to 15 per cent in April 2025, will add further pressure to business costs. Critics argue this could accelerate job losses and force companies to freeze hiring plans, potentially pushing unemployment towards the Bank of England’s forecast peak of 5 per cent.
As Britain approaches a critical autumn period, with both the Bank of England’s interest rate decision and the Chancellor’s budget looming, the economic outlook remains uncertain. The delicate balance between supporting growth, controlling inflation, and maintaining fiscal credibility will test policymakers’ resolve in the months ahead.
For millions of workers facing another winter of economic uncertainty, the promise of better times ahead feels increasingly distant as real wages stagnate and job security diminishes.
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Image Credit:
Prime Minister Keir Starmer and Chancellor Rachel Reeves visit Jaguar Land Rover, Solihull (7 April 2025) — photo by Lauren Hurley / No 10 Downing Street, CC BY 2.0.
