Key Drivers Behind the Rise
1. Slowing Hiring Amid Higher Costs & interest charges!
Businesses are pulling back on recruitment, particularly in lower-paying sectors like retail, hospitality, and wholesale. Rising employer costs—including higher National Insurance Contributions and an increased National Living Wage—are weighing on firms’ hiring decisions.
2. Vacancies Are Shrinking
Job listings have dropped sharply—by tens of thousands in recent months—signaling reduced demand for new hires.
3. Effects of Tax and Wage Policy
Measures introduced in late 2024—such as higher employer National Insurance and a 6.7% hike in the National Living Wage—have increased labour costs. This has made employers more cautious about expanding their workforce.
4. Wage Growth Still Strong
Despite the lack of job openings, wages continue to grow—around a 5% increase in regular pay. This mismatch suggests tight labour supply despite weaker demand.
5. Data Limitations and Alternative Models
The Resolution Foundation’s model—which adjusts for known flaws in official ONS data—projects unemployment may already be at—or near—5% for the quarter ending August 2025. This is based on indicators like vacancies, wage trends, and benefit claims. In contrast, the Bank of England’s forecast remains slightly lower, at a peak of around 4.9%.
6. Weak Broader Economic Outlook
Overall economic pressures—from muted growth to inflation and trade uncertainty—add to downward pressure on jobs. Lower growth reduces demand for labor, making the job market more fragile.
7. Most importantly, high interest rates slow the economy down, The BOE have no regard for this, as long as the vacancies match job demand, however as the job vacancies diminish the Bank of England Governor may seriously regret their foolish short sighted policy, unlike the EU where interest rates are now under 2% (BOE = 4%), thus helping industry, the BOE will find it much more difficult to generate new jobs in a trending down market.
Summary Table
Factor Impact on Unemployment
Higher employer costs Reduced hiring
Falling job vacancies Fewer job opportunities
Wage & living wage rises Pressured employer budgets
Data-model projections Suggesting sharper rise
Economic slowdown Lower demand for workers
Bottom Line
The convergence of rising employer costs, declining vacancies, stubborn inflation, and fragile economic growth is weakening the UK labour market. As a result, the unemployment rate is projected to climb to approximately 5% by late summer 2025—a level not seen since early 2021.
Would you like a breakdown of how this compares to previous economic cycles or insights into which demographics are most at risk? if so use our contact email to request.