Graduate Employment Costs Surge Following Budget Reforms
Graduates and young workers entering the UK job market are facing significantly higher employment costs as a direct result of Chancellor Rachel Reeves' fiscal policies. According to fresh economic analysis, the real-term cost of hiring graduates and other entry-level workers has increased by seven per cent following recent tax reforms.
Tax Reforms Drive Hiring Cost Increases
The National Institute of Economic and Social Research (Niesr) has conducted detailed analysis showing that changes implemented in Reeves' first Budget have substantially impacted employment costs. The lowering of the salary threshold for employers' national insurance contributions, combined with an increase in the tax rate to fifteen per cent, has created what economists describe as a significant burden on businesses seeking to expand their workforce.
These fiscal measures have generated approximately £25 billion in additional government revenue annually, but have simultaneously raised the cost of hiring entry-level workers by seven per cent between 2024 and 2025. When combined with increases to the national living wage, economists warn these policies are dampening labour market dynamism across multiple sectors.
Labour Market Challenges Intensify
Stephen Millard, director of Niesr, emphasised that younger workers have been particularly affected by these changes. "We do feel the labour market is particularly difficult for entry level workers," Millard stated, highlighting the disproportionate impact on graduates and young professionals seeking their first career positions.
Official employment statistics paint a concerning picture over the last eighteen months:
- Unemployment has risen from four per cent to 5.1 per cent
- Job vacancies have declined rapidly across multiple sectors
- Workers in retail, information technology and catering have been most affected
Researchers noted that businesses have become more cautious about expanding payrolls and increasingly reluctant to take risks on new employment matches. This has contributed to a decline in job-to-job transitions and slower sector reallocation, potentially weighing on long-term productivity growth.
Economic Growth Forecasts Revised Downward
The think tank's latest analysis presents revised growth projections that question the Labour government's economic strategy:
- Growth forecast for this year stands at 1.4 per cent
- Projected growth slows to 1.3 per cent in 2027
- Further reduction to 1.1 per cent anticipated in 2028
While Niesr's current growth forecast remains higher than projections from other analysts like EY, it represents a slight downgrade from previous estimates. The analysis suggests higher government expenditure may boost activity this year, but longer-term prospects appear less optimistic.
Public Finance Concerns Emerge
The research raises significant questions about the state of public finances, graduate hiring prospects and immigration planning. Niesr economists have issued warnings about multiple factors that could strain the public purse:
- Potential sharp decline in net migration to near-zero levels
- Budget deficit projected at £138 billion in current financial year
- Government's aversion to reducing public debt creating "precarious" position
Analysis suggests that if immigration rates matched emigration, leading to stagnant population growth, the UK economy could be 3.6 per cent smaller by 2040. The budget deficit might widen by approximately 0.8 per cent of GDP, creating a £37 billion gap between tax revenue and public expenditure in today's prices.
Future Labour Market Considerations
Economists have identified additional factors that could influence employment trends in coming years:
- Artificial intelligence may create "upward pressure" on unemployment rates long-term
- Current evidence suggests AI hasn't yet driven significant workforce reductions
- Unemployment expected to peak at 5.4 per cent this year before slow decline
- Employment Rights Act could intensify employer burdens when fully implemented
The combination of tax reforms, wage increases and broader economic factors has created what analysts describe as a challenging environment for graduate employment and business expansion. As the government continues its fiscal policy approach, monitoring these labour market dynamics will be crucial for understanding their long-term economic impact.
