UK Unemployment Rises to Highest Level Since 2021 as Employer Costs Bite

The UK labour market is entering choppier waters as the unemployment rate has climbed to 4.5%, the highest level seen in nearly four years, according to the latest data from the Office for National Statistics (ONS). This rise signals mounting strain on the workforce amid increased employer costs and persistent economic headwinds.

The figure, covering the first quarter of 2025, is up 0.2 percentage points from the previous quarter and represents the highest joblessness rate since the summer of 2021. The increase is just one piece of a wider labour market puzzle showing signs of cooling across multiple indicators—including vacancies, payrolled employment, and wage growth.

A Tipping Point for Employers?

The sharp rise in unemployment follows April’s implementation of higher employer National Insurance contributions (NICs) and a 6.7% rise in the National Living Wage. Chancellor Rachel Reeves’s move to raise NICs as part of a broader £25bn fiscal strategy was always expected to generate ripple effects—but the speed at which employment figures have reacted is raising concerns.

Stephen Evans, Chief Executive of the Learning and Work Institute, said, “The labour market continues to slow, with the largest employment falls seen in retail and hospitality.” These sectors, which are highly sensitive to wage floor increases, are among the first to reflect stress when employer costs surge.

Vacancies Shrink, Confidence Wavers

The number of job vacancies has also taken a noticeable hit. From February to April 2025, the total number of advertised positions fell by 5.3% to 761,000. That’s a staggering drop of 131,000 year-on-year, with the construction industry experiencing the steepest contraction.

Michael Stull, Managing Director at ManpowerGroup UK, offered a blunt assessment: “The latest labour market data confirms the sentiment of most British employers, whose confidence remains stunned against a backdrop of significant national change and global uncertainty.”

Meanwhile, the number of payrolled jobs fell by 47,000, or 0.2%, between February and March—a further indication that businesses are trimming workforce costs, either to protect margins or brace for potential turbulence ahead.

Wage Growth: Strong but Softening

One aspect that remains relatively resilient is wage growth, although it, too, is showing signs of softening. Regular earnings (excluding bonuses) rose by 5.6% in the first quarter, slightly down from 5.9% in the prior period. Despite the dip, this rate is still elevated compared to pre-pandemic trends.

Economists are paying close attention to this metric because high wage growth can fuel inflation, especially if businesses pass labour costs onto consumers. In light of last week’s Bank of England interest rate cut to 4.25%, further easing will likely depend on how pay trends evolve.

Thomas Pugh, economist at RSM UK, noted, “The labour market is clearly cooling, which should feed into slowing wage growth through this year. But it isn’t collapsing. The hawks on the MPC [Monetary Policy Committee] will still be too concerned about strong wage growth to consider going for another rate cut in June.”

A Bank of England Dilemma

The Bank of England now finds itself caught between two conflicting signals: a slowing jobs market and persistently strong wage growth. Chief Economist Huw Pill voiced his concerns at a conference at the London School of Economics, saying the risk of “sticky inflation” could require the Bank to maintain or even increase rates longer than anticipated.

“The response of monetary policy, in order to ensure that we get back to our [2% inflation] target within a reasonable cycle, needs to be somewhat more aggressive or more persistent in itself,” Pill said.

In other words, even as employment falls and vacancies contract, the Bank may still hesitate to deliver further rate cuts if it believes high pay growth could keep inflation above target.

Employment Stability: A Mixed Picture

While the labour force survey recorded an unchanged employment rate of 75%, the ONS’s payrolled employment figures suggest a soft erosion of workforce numbers. The mixed results have been complicated by ongoing data quality issues at the ONS, particularly regarding its labour force survey, which has suffered from low response rates.

The ONS did note a "clear improvement" in response quality in its latest update, but its data is still subject to an independent review, and National Statistician Ian Diamond recently stepped down, citing health reasons.

The economic inactivity rate—which measures the share of the working-age population neither working nor seeking work—fell slightly to 21.4%, though it remains above pre-pandemic levels. Long-term sickness and a changing work-life balance post-Covid have both been cited as factors behind elevated inactivity.

Reeves’s NIC Gamble

The government’s decision to raise employer NICs was intended to increase public revenue without directly hitting consumer pockets. But the timing—alongside a sharp rise in the minimum wage and weak global demand—has created a perfect storm for UK businesses, particularly SMEs.

Some economists argue the move is a necessary part of balancing the books, especially given the UK’s mounting public debt. But the short-term impact on hiring and business sentiment is increasingly hard to ignore.

“Time will tell whether this is an indicator of a broader slowdown or a temporary effect,” said Evans of the Learning and Work Institute.

A Difficult Road Ahead

The UK labour market is clearly under pressure. Rising unemployment, shrinking vacancies, and faltering employer confidence are converging at a time when many households are already squeezed by high living costs and economic uncertainty.

What happens next depends heavily on two variables: how quickly wage growth cools and whether businesses regain the confidence to invest and hire. The Bank of England, for its part, must now navigate a nuanced path between stimulating growth and keeping inflation in check.

Looking for Guidance on Employment Matters?

If you're an employee facing redundancy, unfair dismissal, or other work-related issues—or an employer unsure about your obligations amid recent policy changes—Parachute Law's employment solicitors can help. Their expert legal team offers tailored advice to help you navigate these challenging times with clarity and confidence