The Ghosts of Christmas Past and Present are haunting the labor market as the U.K. economy sheds jobs for the second winter in a row.
According to preliminary data, more than 190,000 jobs have been lost since the fall of 2024. The first Labour Budget after the election played a big role. Employers’ wage costs increased tremendously due to the hike in the National Insurance Contribution. This, combined with the massive surge in the minimum wage, has caused significant employment losses across several industries, especially in low-margin sectors that also have high labor input costs. Unsurprisingly, retail and hospitality have suffered the most with job losses of about 100,000 and 70,000, respectively.
While the 2025 Budget was not as disastrous as the previous one, confidence in the U.K. economy has been shattered. Rumors about significant tax hikes for both households and businesses in the months leading up to the event contributed to a period of economic stagnation this fall. With consumers tightening their belts and businesses wary of costs, payroll employment declined by almost 40,000 in November, following declines in September and October.
The unemployment rate is now at its highest level since COVID. While there are some data concerns, the weakening of the labor market is clear as day, and of larger magnitude than what other countries are experiencing. The UK unemployment rate has risen from a little over 4% in 2023 to 5.1% last month. For the first time in more than a decade, U.K. unemployment is higher than the OECD average.
The labor market for young people in the U.K. is significantly worse than that for professional hires. As white-collar recruitment has slowed — because of a weak macro environment but also because of AI — job vacancies for graduate roles have plummeted. Youth unemployment has increased to 14% recently, a decade-high level. The number of young people who are NEET — not in employment, education, or training —– has soared and s now exceeds 900,000.
Why so timid on rate cuts?
Today’s interest rate cut by the BoE was widely anticipated following the weak labor market data. But compared to other advanced economies, rates in the U.K. remain relatively high for now. There is no doubt that monetary policy has weighed on economic activity in recent years and contributed to the job losses that the U.K. is experiencing.
So why then is the Bank of England not cutting rates more aggressively to support economic growth?
Well, because the U.K. has been a little bit of an outlier across advanced economies when it comes to inflation and wage growth. Even as inflation has fallen more than expected this week, with more than 3% it remains well above the Bank of England’s 2% inflation target.
While private sector pay has recently fallen from above 5% to about 4%, public sector wages have recently increased at a much faster rate. Thanks to very generous government pay policies, public wages are now increasing at a rate of 8%. That pace is obviously extremely unsustainable, both from a fiscal as well as from an inflation point of view.
While pay growth is expected to moderate somewhat in the coming year, the BoE continues to operate with caution and does not want to ease monetary policy prematurely — a not-so-merry cut — given the enormous inflation overshoot that the U.K. has experienced in recent years.
Financial markets are pricing in another two rate cuts for 2026. While this will modestly support economic activity, it will not be able to provide the growth boost that the U.K. so desperately needs.
The bigger worry: Does Labour have a plan for growth?
Heading into 2026, the bigger worry to me is that Labour has no plan for growth.
No doubt they inherited a bad economy, but they have been incapable of implementing any meaningful change so far. As previously discussed, their big policies – NIC hike, minimum wage, the Employment Rights Bill – have spectacularly backfired and contributed to a stagnant labor market.
According to Starmer, higher childcare allowance, freezing train tickets, and slightly lower energy costs are enough to deliver a better economic outcome next year. Well, if that is their thinking, thoughts and prayers are in order!
As we have emphasized on several occasions, lackluster private sector investment, Brexit, unaffordable housing, underinvestment in infrastructure and energy sector – those are the big-ticket items that are holding back U.K. economic growth.
On many fronts, the government’s ambitions have fallen well short of what’s needed to revive the economy. As a result, the OBR and other institutions have revised future economic growth down as Labour seems to be more preoccupied about maintaining and increasing welfare spending than supporting economic growth.
But maybe there is some rethinking happening after all. After years of impasse, Labour has approved new runways for London’s airports. And just this week, a consultation for the most ambitious proposal for planning reform in decades has started. Even if only some of the proposals will eventually pass, it could be meaningful change as unlocking Great Britain’s housing market is essential for future economic growth.
What does that mean for recruiters?
For recruiters, this is a very different market from the one they faced just a few years ago. Hiring demand is weaker, candidate pools are growing, and cost pressure is forcing employers to be far more selective about when and where they hire.
But this is not a uniform downturn: demand for experienced, high-productivity talent remains more resilient, while entry-level and low-margin roles are bearing the brunt of the adjustment. Furthermore, hiring for niche roles, especially in the blue-collar segment, remains tricky.
In this environment, recruiters will need to focus less on volume and more on cost-effectiveness. This means helping employers hire fewer people, faster, and with clearer returns on investment as companies are striving for efficiency in the current volatile economic environment.
