UK Labour Market Shows Signs of Strain as Unemployment Climbs
Official statistics released on Tuesday 17 February 2026 reveal a concerning trend in the UK labour market, with unemployment reaching its highest level since the immediate aftermath of the pandemic. The data indicates a steady loosening of employment conditions, coupled with a notable deceleration in wage growth, raising significant questions about economic resilience and future monetary policy.
Key Figures Point to a Weakening Jobs Landscape
The Office for National Statistics (ONS) reported that the unemployment rate crept up to 5.2 per cent for the period between October and December 2025. This figure not only surpasses market expectations but also marks the highest joblessness level recorded since early 2021. The deterioration was further evidenced by a decline of 46,000 workers on company payrolls compared to the previous quarter, with provisional estimates suggesting an additional 11,000 jobs were lost in January 2026.
"The number of workers on payroll fell further in the final quarter of the year, reflecting weak hiring activity, although it is largely unchanged in the latest month," stated Liz McKeown, director of economic statistics at the ONS. This sentiment was echoed by investment managers, with Jonathan Raymond of Quilter Cheviot observing that the labour market was "showing signs of creaking when economic growth is difficult to come by."
Policy Impacts and Business Concerns
Analysts and business leaders have pointed to recent government policies as a primary factor behind the sluggish hiring activity. Businesses are grappling with increased operational costs, including elevated payroll taxes and a higher minimum wage. Furthermore, the looming implementation of the Employment Rights Act has introduced considerable uncertainty. A recent survey indicated that approximately one-third of firms would likely reduce their hiring as a direct consequence of these new measures, exacerbating the employment downturn.
Wage Growth Eases, Increasing Rate Cut Speculation
The softening labour market has directly impacted earnings growth. Average earnings, including bonuses, slowed to an annual rate of 4.2 per cent in the final three months of 2025, down from 4.6 per cent in the preceding period. This deceleration surprised City economists, who had anticipated the figure to remain broadly stable. Excluding bonuses, average wages grew by 4.2 per cent, slightly below the previous reading of 4.4 per cent but aligning with forecasts.
McKeown highlighted a significant divergence, noting that private sector wage growth had fallen to its lowest rate in five years. In contrast, public sector wage figures remained "elevated" as pay awards from the previous year continued to influence the data.
Mounting Pressure on the Bank of England
The combination of rising unemployment and cooling wage inflation has substantially increased the probability of an imminent interest rate cut by the Bank of England. Financial markets now perceive a greater likelihood of a reduction in March, a sentiment reflected by a 0.3 per cent weakening of the pound against the US dollar following the data release.
"The data raises the prospect of a March rate cut," asserted Yael Selfin, chief economist at KPMG UK. "The Monetary Policy Committee will be reassured by further evidence of pay pressures easing, and the labour market continuing to soften. The Bank may also want to minimise downside risks to the labour market and lower rates ahead of the next forecast meeting in April."
This view was supported by Paul Dales, chief UK economist at Capital Economics, who stated, "The lack of green shoots of recovery in the labour market and further fall in wage growth supports the idea that the Bank of England has at least a couple more interest rate cuts in its locker, with the chances of the next cut happening in March rather than April edging higher."
The latest labour market report paints a picture of an economy facing headwinds, with policy decisions and global economic conditions testing its stability. All eyes will now be on the Bank of England's next move as it balances inflation concerns against the clear signs of a deteriorating employment landscape.
