The genuine extent of unemployment in the United Kingdom: an analysis
The UK labor market in mid-2025 is experiencing mixed but challenging conditions, with employment figures slightly declining, unemployment and economic inactivity rates elevated compared to pre-pandemic levels, persistent wage pressures, and weakening hiring demand.
According to the Office for National Statistics (ONS), the employment rate for ages 16-64 was about 75.3% in April–June 2025, slightly above last year and up in the latest quarter. However, the unemployment rate was estimated at 4.7%, higher than a year ago and above pre-pandemic levels. The economic inactivity rate for ages 16-64 was approximately 21.0%, lower than last year but still elevated compared to before the pandemic.
Payrolled employment has been declining gradually over the past six months, with sector-specific reductions like hospitality (-4.9% year-on-year) and information & communication (-2.7%). Job vacancies have decreased for the 37th consecutive quarter to about 718,000, indicating weaker recruitment and some companies not replacing leaving workers. Redundancy notifications remain stable, showing no immediate spike in unemployment despite weak hiring.
Average earnings growth remains relatively high: regular earnings grew about 5.0% annually (excluding bonuses), with slightly higher growth in the public sector (5.7%) than private (4.8%). Persistent wage growth is seen as a source of inflationary pressure and causes caution by the Bank of England regarding interest rate cuts despite a recent 25 basis point cut to 4%.
Elevated wage pressures and higher economic inactivity can be attributed to persistent labor shortages in some sectors despite falling vacancy numbers, lingering impacts of the pandemic, changes in workforce participation, and possibly health-related or demographic factors keeping people out of the labor force. The slowdown in overall economic activity, including in sectors like construction, dampens labor demand, limiting hiring growth but not yet increasing significant unemployment, creating an environment of tight labor supply against modest job growth. Fiscal and policy constraints, including government-imposed fiscal discipline and delayed easing of pandemic-related restrictions, may also contribute to subdued hiring and higher inactivity.
Meanwhile, the global economic landscape presents a stark contrast. The S&P 500 reached a record high at the end of last week, and the Nasdaq up by 4.1%. This contrast is particularly evident in the Chinese market, where Chinese stocks have slumped at the start of the week, with the Shenzhen Composite down by 5.5% and the CSI 1000 down by 7.2%. The selling pressure in Chinese shares could increase the risk of social unrest, with investors venting their frustrations with the Chinese market on social media.
In the UK, the ONS will conduct face-to-face interviews to improve the quality of UK labour market data. European indices reached record highs last week, and investors are watching whether these earnings reports can help them sustain further gains. This week, several notable companies such as Palantir, McDonald's, Caterpillar, Eli Lily, Walt Disney, PayPal, Pepsi, BP, Barratt Developments, Unilever, Astra Zeneca, BATS, Total, Siemens, Kerring, Hermes, and others are set to release earnings.
The market is currently expecting just under 5 rate cuts for 2024, but the Fed's dot plot sees rates falling to 4.6% by year end. If Chinese officials cannot find a way to stabilise financial markets soon, this could lead to political problems for Beijing. Volatility in the shares of China's small and medium-sized companies has led to fears about margin calls and derivatives called snowballs that could exasperate the selling pressure.
In summary, the UK labor market in mid-2025 is characterized by slightly weaker employment trends, stubbornly high economic inactivity, ongoing job vacancies but reduced hiring, and sustained wage growth pressures driven by tight labor supply despite economic slowdown. This combination explains elevated wage inflation and higher-than-expected economic inactivity rates. Monetary policymakers remain cautious due to these persistent wage pressures impacting inflation dynamics.
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