New official statistics have revealed a significant cooling in wage growth for British private sector employees, with pay increases falling to their lowest level in five years. The data, released on Tuesday 20 January 2026, paints a picture of a tightening labour market as unemployment holds steady but is forecast to rise.
A Growing Divide in Pay Rises
The figures from the Office for National Statistics (ONS) show a stark contrast between the public and private sectors. Public sector workers saw their average earnings increase by 7.9% in the year, a rate the ONS describes as still "elevated" due to the lingering impact of earlier pay settlements.
In sharp contrast, private sector staff experienced average pay growth of just 3.6%. This marks the weakest rate of increase for private sector wages since 2021. While this means employees are still receiving pay rises, the increments are notably smaller than in recent years, squeezing household budgets against the backdrop of living costs.
Unemployment Steady But Expected to Climb
Concurrent unemployment data covered the three-month period leading to November 2025, a time dominated by discussions of an impending tough government budget. The ONS reported that the UK's jobless rate remained unchanged at 5.1%.
This represents a substantial increase from the 4.1% rate recorded when the Labour government took office in 2024. Economists and analysts anticipate further deterioration in the jobs market in the coming months.
Economic Headwinds and Future Projections
The outlook for employment appears challenging. Accounting giant KPMG predicts the unemployment rate could reach 5.3% by the end of 2026. The firm attributes this forecast to rising employment costs, which are dampening demand for new hires as businesses become more cautious.
The combination of slowing wage growth in the private sector and a stagnant, yet rising, unemployment rate signals a shift in the UK's post-pandemic labour market dynamics. The data suggests employers are gaining more leverage, which could ease inflationary pressures but also reduce workers' real-term income growth.
