Britain’s unemployment rate edged down to 4.9 per cent in the three months to April, according to figures published by the Office for National Statistics (ONS) on Thursday, handing policymakers a modest piece of good news just hours before the Bank of England delivered its latest call on interest rates.
The reading was down from the five per cent recorded in the previous quarter and came in better than the expectations of economists, who had pencilled in an unchanged jobless rate of five per cent. It is the sort of small upside surprise that rarely shifts the dial on its own, but it lands at a sensitive moment for rate-setters weighing how much slack is building in the labour market.
Pay growth excluding bonuses held steady at 3.4 per cent over the same period, comfortably ahead of forecasts of 3.2 per cent. Adjusted for consumer price inflation, real earnings rose by 0.3 per cent, leaving workers fractionally better off in real terms. Total pay including bonuses climbed 4.4 per cent, also beating the four per cent the market had expected.
The numbers arrived only hours before the Bank of England announced its decision, with the Monetary Policy Committee widely tipped to leave borrowing costs unchanged at 3.75 per cent. The Bank trimmed rates to that level late last year, as covered in our report on how UK interest rates were cut to 3.75% as the Bank signalled inflation nearing target, and has since trodden carefully amid a patchy growth picture. The full detail of the Committee’s thinking is set out on the Bank’s own Bank Rate page.
Rate-setters have been watching the jobs data closely as they judge whether elevated oil prices, linked to the conflict involving Iran, could feed through into stronger wage demands. A tight labour market would raise the risk of a second-round inflation effect, the kind of dynamic the Bank is determined to avoid.
Responding to the figures, Work and Pensions Secretary Pat McFadden said the data showed 400,000 more people in work than a year earlier, while acknowledging that instability in the Middle East was creating uncertainty. “We have the right economic plan for growth and stability in a volatile world, and we are taking action to create opportunity and make sure that no one is left behind,” he said.
He pointed to what he called the biggest youth employment reforms in a generation, including a Youth Guarantee backed by £2.5 billion of investment aimed at creating almost a million opportunities for young people, and the Connect to Work programme designed to support 300,000 disabled people into employment.
Not everyone read the release as a turning point. Independent economist Julian Jessop cautioned that the underlying trend remained soft. “Even after some favourable revisions, the trend in payroll jobs is still down, with 119,000 fewer employees in May than in the same month a year earlier, and 187,000 fewer than two years ago,” he said.
A further worry for the Committee is whether softer demand for workers is eroding employees’ bargaining power and their ability to push for bigger pay rises. Most members believe labour market conditions have loosened compared with recent years, making large wage increases less likely. The shift is stark set against the period after Russia’s invasion of Ukraine in 2022, when inflation peaked at 11.1 per cent and wage growth ran above five per cent for almost three years.
Suren Thiru, chief economist at ICAEW, struck a downbeat note. “These figures point to a jobs market struggling under the strain of soaring energy bills and employment costs, with more firms limiting hiring and holding down pay, especially for younger workers,” he said. The cooling he describes echoes the picture in our earlier coverage of how the UK jobs market is slowing as wage growth eases and vacancies fall amid higher business taxes.
Thiru argued that weaker wage growth would reassure policymakers that any inflationary spillover from the conflict involving Iran could be contained. “These figures seal the deal on a midday interest rate hold by reassuring rate-setters that a softening labour market can help keep this Iran-driven inflation shock short-lived by dampening demand across the economy,” he said, adding that the Committee’s vote split and accompanying minutes could take on a slightly more dovish tone.
The claimant count told its own story. The number of people claiming unemployment benefits rose by 31,200 in May, ahead of forecasts for an increase of 25,800 and following a revised rise of 8,300 in April. Employment grew by 100,000 in the three months to April, down from 148,000 in the previous period but still ahead of expectations for growth of 80,000.
Thiru warned that falling vacancies suggested demand for workers was weakening at an uncomfortable pace, as businesses absorbed mounting financial pressures and automation reshaped the workforce. That theme of a stalling hiring engine has been building for some time, as our reporting on long-term unemployment climbing to a decade high made clear.
“While the US-Iran peace deal has halted hostilities, the damage to the UK’s labour market is already done,” he said, predicting that unemployment could drift towards six per cent if higher energy costs continue to weigh on employers’ hiring plans.
For now, the headline rate is moving in the right direction. The harder question for businesses and policymakers alike is whether that holds once the full weight of higher costs and weaker demand works its way through.
