The UK unemployment rate rose to 4.5% in January-March 2025, its highest level since the summer of 2021 and up 0.2 percentage points on the previous quarter, according to the Office for National Statistics (ONS). The figures come from the Labour Force Survey, whose volatility has attracted scrutiny, yet the ONS says recent methodological changes have “clear[ly] improve[d]” its quality. Economic inactivity remains elevated at 21.4%, while the employment rate is broadly unchanged at 75%.

Liz McKeown, Director of Economic Statistics, ONS, said:

“The broader picture continues to be of the labour market cooling.”

Fewer vacancies, slower pay growth

Evidence of a cooling jobs market extends beyond headline unemployment. Vacancies fell for a 34th consecutive quarter, down 42,000 to 761,000 in the three months to April, with construction posting the steepest drop. Average regular pay growth slipped to 5.6%, from 5.9%, which is still strong by historical standards but marginally less of a headache for the Bank of England after last week’s cut in bank rate to 4.25%. Payroll tax data shows that pay-rolled employee numbers declined by 47,000 between February and March and provisionally by a further 33,000 in April.

Stephen Evans, Chief Executive, Learning and Work Institute, said:

“The labour market continues to slow, with the largest employment falls seen in retail and hospitality.” 

What it means for households

For employees and job-seekers, the figures signal stiffer competition. Sectors that ramped up wages to plug shortages – retail, hospitality and construction – are slowing hiring, so new roles may take longer to secure and starting salaries could level off. Those already in work may see wage bargaining power ease, but with inflation still above 3%, real incomes remain under pressure. A softer labour market also tends to weigh on consumer confidence; households might favour precautionary saving over discretionary spending, affecting everything from leisure purchases to home-improvement plans.

Implications for businesses

Businesses should treat the data as a mixed blessing. A larger pool of applicants can make recruitment easier and temper wage bills, yet weaker demand could hit revenue forecasts, especially in consumer-facing industries. The £25 billion rise in employer National Insurance contributions and a 6.7% increase in the National Living Wage are already squeezing margins; any reduction in sales volumes will amplify that strain. Management teams may wish to:

• Stress-test cashflow forecasts using more conservative turnover and payroll scenarios.
• Review staffing mixes – full-time, part-time and temporary – to retain flexibility.
• Benchmark reward packages against local market rates to avoid overpaying in a softer environment while still retaining key talent.
• Plan for phased investment rather than significant one-off capital outlays until demand trends stabilise.
  

Outlook: Planning under uncertainty

Economists expect further, gradual softening through the year as higher borrowing costs and global trade frictions filter through. Financial markets currently price in one or two additional Bank Rate cuts by December, however, the Monetary Policy Committee has stressed that wage growth must cool decisively before it accelerates easing. Keep an eye on the next labour-market release (10 June) and June’s Bank of England meeting: both will inform staffing budgets and pricing decisions for the second half of 2025. 

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