Static labour market showing signs of movement

A rise in April to 4.6% shows that UK unemployment is slowly creeping up as the impact of the Government’s decisions in the 2024 Autumn Budget begin to kick in.

Businesses have been reacting to increased employer NICs and the rise in the minimum wage, both in effect from 6th April.

While we are not seeing mass redundancies, falling job vacancies shows that employers remain cautious regarding new hires and that employees are staying put in jobs due to concerns about job security.

Despite a strong start to the year — economic growth of 0.7% in the first quarter was a welcome surprise — this has not been reflected in the labour market.

Driven by one-off economic stimuli such as a surge in exports in anticipation of potential tariffs, this was not sustainable growth that will have a positive impact on job creation. When the Chancellor outlines her spending review on Wednesday, she has the opportunity to kickstart job creation by committing to investment in infrastructure and public services, but with the Government’s finances thinly spread, other areas of public expenditure may come under pressure.

Nonetheless, a significant acceleration in unemployment remains highly unlikely due to a persistently tight labour market, with unemployment remaining at comparatively low levels historically.

The tight labour market means that real wages are rising — despite a drop in average earnings growth (excluding bonuses) to 5.2%, this remains above inflation at 3.4%. While this is putting money in the pockets of consumers and encouraging spending in the economy, rising wages in the absence of an increase in productivity have an inflationary effect that the Bank of England is acutely aware of.

As the Bank’s Monetary Policy Committee continues to be divided about the pace of interest rate cuts, wage growth will be on the mind of those more cautious members of the Committee when they next meet to decide rates in July. A cumulative 0.7 percentage point drop from February to April suggests that wage growth is moving in the right direction, but the Committee will want to see this trend continue before it fully commits to a more aggressive rate-cutting strategy.