UK Jobs Market Softens but Wage Growth Remains Stubbornly High, Leaving Bank of England in a Policy Dilemma
Key Takeaways:
- Hiring slows, but job market not collapsing – UK payrolls fell for the sixth month in a row in July, vacancies dropped to their lowest since early 2021, yet unemployment stayed at 4.7% and inactivity rates improved.
- Wage growth still a concern for inflation – Regular pay growth held at 5%, well above the Bank of England’s 3% comfort zone, keeping pressure on policymakers despite signs of a cooling labour market.
- BoE caught in a policy bind – With hiring easing but wages still high, the Bank faces a tough choice on rate cuts, making a November reduction possible but far from guaranteed.
Britain’s labour market continued to lose momentum in July, with payroll numbers falling for a sixth straight month and job vacancies sliding to their lowest level in over four years. Yet wage growth remains high enough to worry policymakers, underlining the Bank of England’s difficult balancing act between tackling inflation and avoiding an employment slump.
The Office for National Statistics (ONS) reported on Tuesday that the number of employees on company payrolls fell by 8,000 between June and July, according to provisional HMRC data. Although this marks another decline in headcount, the drop is smaller than in previous months.
June’s payroll figure was also revised, showing a fall of 26,000 rather than the 41,000 initially reported — suggesting the pace of job losses is slowing, even if the overall trend remains negative.
Vacancies Slide to Lowest Since Early 2021
The number of job openings fell by 44,000 in the three months to July, bringing the total to 718,000. That’s the lowest reading since the three months to April 2021, when the UK was still feeling the economic effects of COVID-19 restrictions.
Outside of the pandemic, it’s the weakest level for vacancies since early 2015. The ONS said the drop reflects a clear cooling in labour demand, with evidence that many firms are either refraining from new recruitment or not replacing departing staff.
Pay Growth Still Strong, Keeping Inflation Risks Alive
Despite the slowdown in hiring, average weekly earnings excluding bonuses grew by 5% in the three months to June, unchanged from the previous period and well above the roughly 3% level economists see as consistent with the Bank of England’s 2% inflation target.
Private sector pay growth, a metric closely tracked by the BoE, edged down slightly to 4.8%, but still remains historically high. This persistence in wage growth — even as hiring cools — is part of what Jack Kennedy, senior economist at Indeed, described as a “stagflation quandary” for policymakers.
“While a further rate cut in November remains on the cards, it’s not a done deal with wage growth remaining elevated amid concerns over inflation persistence,” Kennedy said.
The Bank of England’s Tightrope
The central bank cut its main interest rate by 0.25 percentage points to 4% last week — the first reduction in over two years — but the decision was narrow, passing by just a 5-4 vote among members of the Monetary Policy Committee (MPC).
The MPC is split between those worried that weakening hiring could tip into a more serious downturn and those concerned that strong wage growth will keep inflation stubbornly high. The Bank currently expects headline inflation to reach 4% in the near term — double its target — driven in part by food and energy prices.
Sterling edged higher following the latest jobs data, as investors pared back expectations for another BoE rate cut this year. Markets are now fully pricing the next cut only in February 2026, according to LSEG data.
Tax Hikes and Minimum Wage Rise Shape Hiring Trends
Employers have been vocal about the impact of Chancellor Rachel Reeves’ April tax changes on hiring and pay decisions. In addition to a sharp rise in the National Living Wage to £12.21 an hour, employer National Insurance Contributions (NICs) increased from 13.5% to 15%, with the earnings threshold for NIC payments lowered from £9,100 to £5,000 per year.
These moves have raised labour costs significantly for businesses — especially in low-margin sectors like hospitality, retail, and social care — and, according to some firms, contributed to higher consumer prices.
However, Thomas Pugh, chief economist at RSM UK, sees signs that the worst of the adjustment may be over.
“It looks like the worst of the adjustment to the big increase in labour costs is now behind us, and that the labour market is now stabilising,” Pugh said.
Unemployment Steady, But Survey Reliability Questioned
The unemployment rate held at 4.7% in the three months to June, its highest since mid-2021. However, this figure is based on the Labour Force Survey, which the ONS is currently overhauling due to concerns about low response rates and reliability.
Even so, the stability in the jobless rate suggests that while hiring is slowing, large-scale layoffs remain limited.
Encouraging Signs in Labour Force Participation
One brighter data point for both the BoE and the government is the inactivity rate — the share of working-age people neither in work nor looking for work — which fell to 21%, its lowest level since before the pandemic began.
A lower inactivity rate indicates more people are entering or re-entering the workforce, potentially easing some of the recruitment pressures that contributed to the post-pandemic hiring boom and subsequent wage spikes.
BoE’s Policy Path: November Cut Possible, But Not Certain
The combination of steady unemployment, cooling vacancies, and stubborn wage growth puts the BoE in a tricky position. While the slowdown in hiring supports the case for lower interest rates to stimulate growth, wage growth’s persistence — and its potential to feed inflation — makes aggressive rate cuts risky.
For now, a second rate cut in November remains possible but will depend on incoming data, especially on inflation and wage trends. If wage growth slows toward the 3% mark and inflation moves closer to target, the MPC could feel more confident in easing policy further.
Sector Impact: Low-Pay Jobs Hit Hardest
Recent ONS and industry data indicate that job losses and reduced vacancies are most pronounced in low-paying sectors such as retail, hospitality, and parts of manufacturing. These industries tend to be most sensitive to changes in labour costs and consumer spending, and many are also facing long-term structural changes, such as the shift to online shopping or automation.
By contrast, sectors like health and social care, IT, and specialised engineering are still seeing strong demand for skilled workers, albeit with more modest pay growth than earlier in the post-pandemic period.
Political Responses Highlight Policy Divide
While the BoE focuses on its inflation mandate, politicians are using the labour market figures to reinforce their economic narratives. Reeves has defended her approach, pointing to the 384,000 more people in work since she took office, while acknowledging there is “more to do” to strengthen job creation.
The opposition has criticised the government for tax and regulatory measures they say are stifling hiring. Shadow ministers argue that reversing some of the April tax increases would give businesses more breathing room to expand staff and wages.
Longer-Term Shifts in the Labour Market
The data continues a trend that began in early 2023: a gradual cooling from the “red-hot” labour market of the immediate post-pandemic recovery, when vacancies surged above 1.3 million amid acute worker shortages.
Since then, the number of job openings has fallen for 37 consecutive months, pay growth has levelled off from its 2022 highs, and employment levels have edged down, albeit from a historically high base.
While the pace of decline has slowed recently, most economists expect the softening to continue through late 2025, particularly if the autumn budget brings further tax measures.
Conclusion: A Labour Market in Transition
The latest ONS figures show a UK jobs market that is neither in freefall nor in rude health. Hiring is slowing, vacancies are at multi-year lows, and payroll numbers have been shrinking for half a year. But wage growth remains resilient, unemployment is stable, and participation rates are improving.
For the Bank of England, this mix of signals represents a monetary policy headache: cut rates too soon, and persistent wage growth could keep inflation above target; wait too long, and the risk of a sharper slowdown in employment grows.
The months ahead will test the central bank’s ability to navigate this middle ground — and determine whether the UK’s economic landing will be soft, or bumpier than policymakers hope.
Need help with employment law?
Related Reading:
Does Employment Law Apply to Independent Contractors?
