Today’s labour market figures point to challenging times ahead as Government and businesses contend with several headwinds. Unemployment is at a four year high of 4.7% which is an increase of 0.3 percentage points on the year. Vacancies have fallen by 56,000 on the quarter and are now at 727,000. This data points to a clear slowdown in the labour market as employers grapple with rising payroll costs and global economic uncertainty. As a result of this slowdown, there are now 2.3 people seeking work per vacancy available.

Economic inactivity is falling but inactivity due to long-term sickness remains elevated

Although these figures are concerning, the rise in unemployment is also partly due to people leaving inactivity as they re-enter the labour market to search for work. Economic inactivity, which refers to people who are not working or looking for work, has fallen to a five year low of 21%, with decreases in the number of inactive people due to temporary sickness, early retirement and caring responsibilities. However, inactivity due to long-term sickness remains a near record of 2.78 million people and has risen by 665,000 since the start of the pandemic. The Government has laid out plans to Get Britain Working, but this figure highlights the challenge the Government faces in supporting these people back into work.

Stagnant living standards and cost of living pressures continue to bite

A cooling labour market is beginning to weigh on pay growth. Nominal regular pay growth (excluding bonuses) has fallen to 5% with real pay now at 1.1%. The weakening pay data comes against a backdrop of over a decade of stagnant living standards. Despite strong wage growth in the last few years, average weekly wages are only £26 higher than at the onset the financial crisis in 2008. Meanwhile, the cost of living continues to eat into family finances with interest rates still above 4% and inflation stubbornly high at 3.6%, driven by a rise in fuel and food prices.

This combination of slowing pay growth and elevated inflation means households are unlikely to feel any better off a year into the new Government. Recent Work Foundation/Survation survey data found that one in six workers are struggling to pay their bills (17%) and four in ten (43%) say they have very little, or nothing left over from their pay at the end of the month. Only half of workers (48%) surveyed believe wage increases are keeping up with the cost of living. People are pessimistic about their economic prospects too. Only 43% expect an above inflation pay rise in the next 12 months while a third of workers are concerned about being laid off in the next year.

Figure 1: Household ability to pay bills

Source: Work Foundation analysis of nationally representative survey of 3,796 UK workers (May 2025).

Government’s industrial strategy and employment rights agenda are key to improving labour market outcomes

While this month’s labour market data is worrying news for a Government under pressure to grow the economy, it should not lose sight of its long-term goal of creating secure well-paid jobs through its industrial strategy and employment rights agendas. As the Government consults on the policy detail and implementation of the Employment Rights Bill, it must stay the course and not water down or delay key provisions of the bill. Many of the new provisions of the bill, like increasing access to Statutory Sick Pay and introducing a right to minimum guaranteed hours will reduce financial insecurity for workers, and has the potential to increase productivity in the long-run.

Due to sampling issues with the Labour Force Survey, we must remain cautious in interpreting the data.

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