Following the election of Keir Starmer last year, the Labour government set out an ambitious growth policy, aiming to revitalize the economy. Ambitious housing targets were set, infrastructure projects like airport expansions were put on a faster track for approval, and efforts were made to revitalize the NHS (National Health Service).
The U.K. labor market, however, continues to defy the government’s ambition of economic revival. It is now abundantly clear that the policies that Labour introduced last year in the Autumn Budget are having a severe negative effect on hiring conditions. After promising no tax cuts for workers, Labour had little choice but to increase taxes on businesses in an attempt to repair public finances. The large increase in the employers’ National Insurance contribution (NIC) together with another hike in the minimum wage though is now hitting workers through a rapidly weakening labor market.
Key economic indicators are now showing that the downturn has even somewhat accelerated in recent months, notably impacting employment in retail and hospitality the hardest.
Unemployment on the rise
The unemployment rate has been climbing steadily. As of March 2025, it has reached 4.5%, up from 4.3% in the previous period. This marks the highest level seen since early 2021, indicating a deteriorating employment outlook for U.K. workers.
Decline in payroll employment
Though there are questions about the accuracy of the unemployment rate data right now, other economic indicators are backing up the fact that the labor market has cooled and is now contracting. Payroll employment, which is based on data from tax authorities and therefore more reliable, has experienced a notable decline since mid-2024. Between February and March 2025, there was a significant reduction of 47,000 jobs, with preliminary data for April indicating a further drop of 33,000 positions. This downward trend is largely attributed to increased employer costs stemming from the Labour Budget’s tax hike on businesses (the increase in the NIC).
Retail, hospitality and construction hit hard
The retail, hospitality and construction sectors have been disproportionately affected by surging employer cost. It’s no wonder, considering all of these are very labor-intensive and typically exhibit relatively low profit margins. Therefore, many businesses had to respond to the rising labor cost pressures by cutting working hours or staff (or both).
Declining job vacancies
Job vacancies have been on a consistent decline since early 2022, falling to about 761,000. Besides the pandemic, this is the lowest level since about 2015 (disregarding the pandemic). Given that total employment has grown since then, the vacancy rate is actually lower than it was back then. Consequently, job-to-job transitions have plummeted as well. The U.K. labor market has become completely static, and hiring is depressed and workers are struggling to change jobs as a result. The hospitality sector has seen their vacancies decline by more than 20% compared to a year ago, with construction trailing barely behind.
Wage growth remains high
Another big concern about the U.K. economy is the fact that wage growth has remained stubbornly high, even as the labor market has cooled significantly. Wage growth for posted jobs continues to grow at rate of 6% while median pay based on payroll data is growing at roughly the same rate. While other economies have seen nominal wage growth fall back to 4% or below recently, the U.K. remains an outlier. This supports household consumption in the short-run, but it prevents the Bank of England (BoE) from easing interest rates to support the labor market as such high nominal wage growth is inconsistent with their 2% inflation target.
While forward-looking measures seem to suggest some cooling, it remains to be seen whether wage growth will fall to a rate that the BoE would be more comfortable with (4% or below) quickly enough.
The curious case of the Q1 GDP surge
Even as the labor market turns sour, the U.K. experienced one of the fastest rates of GDP growth among large advanced economies in the first quarter—GDP rose at a rate of 0.7%. This has surprised the BoE a little, but it still expects growth to be somewhat sluggish.
Two factors can explain this surge. First, net exports increased following the U.S. tariff announcements earlier this year. U.K. exports to the U.S. saw some significant gains.
More importantly though, business investment in the U.K. economy experienced a strong surge. It may be somewhat too early to be confident about this, but there is a chance that the massive hike in labor cost is driving investment and automation, thereby substituting workers for capital.
Following the Brexit vote, business investment in the U.K. cratered, and this can largely explain the abysmal GDP growth figures the country experienced in the last decade. A push towards higher automation, if sustained, might actually be very good news for growth and living standards in the long run, even as workers might feel a little bit of pain right now.
What does that mean for recruiters?
The U.K. labor market continues to weaken significantly. Just three years ago hiring managers struggled to fill their vacancies, now they are more likely to experience the opposite problem. If your company is recruiting in this tough market (for workers), then you are likely to experience a surge in applications for your job postings.
As our data shows, there is a significant positive correlation between rising unemployment rates and job application rates. As unemployment climbs, more individuals are actively seeking employment, leading to heightened competition for available positions. This trend underscores the challenges jobseekers face in a contracting labour market.
Note: While the chart is based on our U.S. data, the underlying principle is the same across labor markets.
For now, recruiters are likely to experience a lower cost-per-application (CPA) compared to several years ago since application volumes surge in a tougher job market. However, this does not necessarily mean that every single posting is easy fill. Depending on geography, sector, and other factors, recruiters might still have difficulties filling some of their more niche roles and therefore also experience higher CPAs.
