UK pay growth slowed to 3.9% in the year to June, the lowest rate in two years, according to figures from the Office for National Statistics (ONS). The slowdown reflects rising business costs linked to the Iran war, which have squeezed budgets for wage rises, while the unemployment rate edged up to 4.2%.
Pay growth and unemployment figures
The ONS reported that average weekly earnings, excluding bonuses, grew by 3.9% in the year to June, down from 4.1% in the previous month. This marks the weakest annual growth since the three months to June 2024, when pay rose by 3.8%. Including bonuses, total pay growth was 4.0%, also down from 4.2%.
Meanwhile, the unemployment rate rose to 4.2% in the three months to June, up from 4.1% in the previous quarter. The number of people in work fell by 49,000, while vacancies dropped by 22,000 to 870,000, the lowest level since mid-2021.
Impact of Iran war on business costs
The ONS attributed the slowdown in pay growth to increased costs for businesses related to the Iran war, including higher energy prices and supply chain disruptions. These costs have forced many employers to rein in pay rises, particularly in manufacturing and transport sectors. According to the ONS, the war has added an average of 1.2 percentage points to annual operating costs for affected firms.
“The Iran conflict has created significant uncertainty for employers, leading to more cautious pay-setting behavior,” said an ONS spokesperson. “We are seeing a clear correlation between sectors most exposed to war-related cost pressures and lower wage growth.”
Real pay and cost of living
Real pay, adjusted for inflation, grew by 1.1% in the year to June, down from 1.5% the previous month, as consumer price inflation remained elevated at 2.8%. The cost of living crisis continues to pressure households, with food and energy prices still rising, albeit at a slower pace.
The Bank of England has kept interest rates unchanged at 4.75% in August, citing concerns about war-induced inflation. Economists expect pay growth to remain subdued in the coming months as businesses absorb higher costs.
Outlook and policy response
The government has announced a temporary support package for businesses in sectors hardest hit by the war, including energy-intensive industries. However, the ONS warns that the full impact on the labor market may not be visible until later this year.
“We anticipate pay growth to stabilize around 3.5-4% over the next two quarters, but risks remain tilted to the downside if the conflict escalates,” the ONS spokesperson added. The next set of labor market figures is due in September, which will provide further clarity on the trajectory.
