UK unemployment rate unexpectedly drops as wage growth slows

The UK’s unemployment rate has unexpectedly dropped, while wage growth continues to rise at its slowest pace in two years, according to the latest figures from the Office for National Statistics (ONS).

Data for July revealed that the unemployment rate fell to 4.2%, defying economists’ forecasts of an increase to 4.5%, up from the 4.4% recorded in the previous month. The fall in unemployment is generally seen as a positive economic indicator, potentially leading to upward pressure on wages.

Despite this, wage growth excluding bonuses slowed to 5.4% in the three months leading up to June, down from 5.8% recorded a month earlier. Although this represents a significant increase in pay, it marks the slowest rate of wage growth seen in two years. When adjusted for inflation, wages rose by 3.2%, offering some relief for workers facing rising living costs.

The slowdown in wage growth was in line with economists’ expectations and is unlikely to alter the current outlook for interest rates. The Bank of England is widely expected to maintain the interest rate at 5% when the Monetary Policy Committee meets in September, though upcoming economic data could influence this decision.

High interest rates have made borrowing more expensive, and while markets currently expect no immediate changes, forthcoming data on economic growth and inflation will be closely scrutinised.

However, the ONS cautioned against over-interpreting the latest labour market figures, noting that they are subject to revision.

Matthew Percival, Director of Future of Work & Skills at the Confederation of British Industry (CBI), highlighted the ongoing issue of economic inactivity, particularly among the 2.8 million long-term sick. He stressed the need for business and government collaboration to improve workforce health, suggesting that tax incentives for employee health programmes could play a vital role.

Percival added, “At the Autumn Budget, the Government has an opportunity to make a meaningful impact through action on employee health tax incentives. Making Employee Assistance Programmes fully tax-free would complement the Government’s Back to Work plan by preventing people from becoming economically inactive in the first place. Our analysis suggests that every £1 invested in this measure could generate £10 for the economy.”