The UK job market is starting to show clear signs of stress. Unemployment has climbed to 5.2% in the final 3 months of 2025. That is the highest level in almost 5 years. It was 5.1% in the previous 3 month period.
The latest figures were released by the Office for National Statistics. The data shows that more people are now out of work and actively looking for jobs.
At the same time, the number of people on company payrolls has fallen again. Over the past year, 130,000 payrolled jobs have disappeared. In just the final quarter of the year, payroll numbers dropped by 46,000. This decline started after the government’s 2024 Budget and has continued since then.
Many businesses say higher costs are making them think twice about hiring. In her first Budget, Chancellor Rachel Reeves increased employer National Insurance contributions and raised the minimum wage. The statistics office says these changes have led to weak hiring activity.
Liz McKeown, a senior official at the ONS, said the labour market is clearly cooling. She explained that fewer people are being added to payrolls. At the same time, more unemployed people are actively searching for work. That combination is pushing the unemployment rate higher.
Job vacancies have stayed fairly steady since mid 2025. But because unemployment is rising, there are now more jobseekers competing for each open role. That number has reached a new high since the pandemic. Redundancies are also slowly increasing.
Wage growth is also losing momentum. Across the whole economy, average annual pay rose by 4.2% in the final quarter. But the picture is very mixed.
Public sector workers saw pay rise by 7.2%. Private sector workers saw pay increase by only 3.4%. This gap is becoming more noticeable.
If you remove bonuses, regular pay grew by 4.2% between October and December. That is down from 4.4% before. When bonuses are included, total pay growth slowed from 4.6% to 4.2%.
After adjusting for inflation, the situation looks weaker. Real regular pay rose by just 0.8%. That is the slowest growth since mid 2023. McKeown said private sector wage growth is now at its lowest level in 5 years.
Young people are facing even more pressure. Economists say rising labour costs are hitting younger workers harder. Peter Dixon from the National Institute of Economic and Social Research said many young workers are being priced out of jobs.
Unemployment among 18 to 24 year olds has risen by more than 2 percentage points in the past 2 years. It now stands at around 14%. A sharp rise in the minimum wage has played a big role in this increase. Another wage rise for 18 to 20 year olds is expected in April. That could make things even tougher for young jobseekers.
Investors are also worried. Jonathan Raymond from Quilter Cheviot said hiring plans were paused after the November Budget and have not properly recovered. He believes higher minimum wages, bigger tax bills for employers, and uncertainty over employment law reforms are all hurting business confidence.
Some economic indicators had started to look more positive. But this latest jobs data has dampened that optimism.
Because of the weaker labour market, expectations for interest rate cuts have increased. Markets now see a 75% chance that the Bank of England will cut rates to 3.5% at its March meeting. That is higher than the 69% probability seen just a day earlier.
Investors also expect 2 rate cuts by the end of the year. If that happens, the Bank Rate would fall to 3.25%.
James Smith from ING said the latest jobs report keeps the central bank on track for a March rate cut. He pointed out that job losses are mostly happening in consumer facing industries like hospitality. Other parts of the economy are holding up better for now. Still, the overall message is clear. The UK labour market is losing strength.
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