While it is all change in Number 10 Downing Street, today’s labour market figures indicate a stable labour market with headline employment, unemployment and inactivity rates largely unchanged. However, deep seated structural challenges remain. We look at three key labour market policy challenges that the new Government must tackle if it is to keep its promise of “bringing back hope” to the country.

Weak pay growth extends living standards squeeze

The new Government has put tackling the cost of living at the top of their agenda but doing so will require confronting sluggish wage growth that continues to squeeze workers’ breathing space. Private sector employees have now experienced eight consecutive months of falling real earnings. These pay pressures come despite cooling inflation and suggest weakening pay offers from employers are at the heart of the challenge. A recent Work Foundation survey shows only one in five employers are planning above-inflation pay rises this year as businesses continue to struggle with rising costs. A looming 13% increase in the energy price cap in the second half of the year will further stretch incomes.

Figure 1: Real wage growth, selected Industrial Strategy and non-Industrial Strategy sectors, year-on-year May 2026

Source: Work Foundation analysis of ONS Labour Market Summary Statistics Table A01 (July 2026)

These pressures will be of particular concern because they land squarely on two key policy priorities: construction and business services. Construction is under strain, having suffered 11 straight months of falling real wages that have shaved 2.5% off earnings in the last year, in a sector that has simultaneously lost about 400,000 jobs since the start of 2019. With the new Prime Minister once again emphasising the need to accelerate the building of new housing, a turnaround in construction employment must be a priority. Perhaps surprisingly, wage pressures also remain high in three key Industrial Strategy sectors: Information & Communication (1% fall in real wages year-on-year), Finance (0.8% fall), and Professional services (0.7%). While all three are higher earning sectors and have seen wage growth since 2019, recent declines may fuel concerns about AI disruption in key service jobs.

Cost of living crunch continues

Flatlining wages have coincided with a cost-of-living crunch. Inflation remains above its 2% target and the energy price cap increased by 13% for the period between July and September 2026. Households are feeling the pinch. Recent ONS public opinion data suggests that many families may have a limited ability to absorb further price rises or unexpected costs. Nearly one in four (24%) households say that they would be unable to afford an unexpected expense of £850, while over on in three (36%) say they will not be able to save any money over the next year. Amidst this backdrop, the new Prime Minister’s emphasis on giving people some breathing space is welcome. However, in addition to providing short-term of cost-of-living support with a VAT cut on energy bills in October, the Government must also tackle the long-term drivers of high housing, energy and transport costs.

Youth unemployment at record high levels

While the unemployment rate remains largely unchanged at 4.9%, youth unemployment continues to rise and is now at a decade long high of 16.4%. Worryingly, one in five of those unemployed have been out of work for more than a year.

This is an urgent policy challenge that the Government must address as long-term youth unemployment negatively affects young people’s earnings potential and mental health across their working lives. The rise in youth unemployment also comes at a time when traditional entry points into the labour market have narrowed. Recent Work Foundation analysis has found that the UK has entered a youth employment drought. “Starter” jobs- vacancies that would be accessible for someone entering the workforce for the first time- have fallen by 49% over the last decade. The UK now has fewer starter vacancies than in January 2021. While there has also been a general fall in vacancies across the UK, the fall in starter vacancies has been steeper in the last year.

Figure 2: The number of available ‘starter’ jobs has fallen dramatically

Source: Adzuna weekly vacancies of ‘starter’ jobs (Work Foundation defined category), UK, 24 April 2016 – 22 March 2026.

The Government’s response must meet the scale of this challenge. It has announced a Jobs Guarantee that will provide 90,000 18–24-year-olds a paid job for six months. While this is a step in the right direction, the programme will only be successful if it adopts a localised approach and offers secure well-paid work that will bolster young people’s future employment prospects.

The need for the new Government to to make work pay

Labour was elected promising to ‘make work pay’ and nearly two years on, today’s figures underline the scale of the challenge to make this a reality. Stable employment rates cannot disguise a labour market where real wages are falling, household finances are under strain and young people are finding it increasingly difficult to find secure work.

While today’s short-term cost of living support is a start, Ministers must create a long-term plan to deliver secure, well-paid jobs in every postcode. Without decisive action, weak pay growth and rising youth unemployment risk defining the new Government’s economic record.

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