The UK labour market continued to weaken at the end of 2025, with official data showing the unemployment rate rising to 5.2% in the three months to December.
This is the highest level in almost five years. Payrolled employment figures from HM Revenue & Customs reveal a year-on-year decline in employee numbers, with payroll jobs down by about 121,000. This indicates a slowdown in hiring. Early estimates for January also show a further drop in payrolled employees, although these figures are provisional and may change.
The slowdown in the job market comes amid broader economic challenges. Wage growth for regular earnings was 4.2% per year, with public sector pay increasing faster than in the private sector, where growth slowed to about 3.4%. Vacancies have remained nearly unchanged, suggesting more jobseekers for each opening.
This is a clear sign of a cooling labor market. The weak job data has strengthened expectations that the Bank of England could lower interest rates as early as its March meeting. Markets are anticipating a rate cut following further signs of slowing inflation. However, economic growth is generally slow, and business confidence remains weak. As a result, the outlook for jobs and the overall economy is still uncertain.
Experts are reacting to the latest figures below:
Jonathan Raymond, investment manager at Quilter Cheviot:
“Continuing the recent trend, the UK labour market slowed once again as it ended 2025 with a lull, is showing signs of creaking at a time when economic growth is difficult to come by. The data from ONS shows the number of payrolled employees in the UK fell by 121,000 in December compared to the same month in 2024. The final quarter of the year saw a drop of 130,000 over the year, with a fall of 46,000 quarter on quarter. January’s initial estimates do not fare much better, though the pace of the declines does appear to be slowing month on month. The unemployment rate now stands at 5.2%, climbing from 5.1% at the previous reading.
“Following a November where hiring plans were put on hold due to the budget, things are yet to get going again, potentially highlighting the longer-term impacts of increases costs that businesses have faced. Increased minimum wage costs, national insurance contributions, business rates and concerns around the impact of the Employment Rights Act continues to show up in the data and appears to be putting a weight on the economy. Economic indicators were beginning to shine some positivity but that has arguably been wiped by this latest data.
“Wage growth data shows that earnings are increasing by 4.2%, with public sector workers continuing to see much higher pay rewards than the private sector. Wage growth has been a scourge for the Bank of England in recent years and it would probably like to see that figure come down further to guarantee a downward trajectory for interest rates.
“Having held rates where they were at the first meeting of the year, calls are growing louder for the Bank of England to reduce rates at its next meeting in March. Inflation is expected to fall considerably in the coming months and as such focus from the BoE will be more on the labour market. With economic growth languishing at the end of 2025, the recipe is there for a rate cut to be delivered. However, without an uptick in consumer or business confidence, growth is likely to continue to be found wanting and the jobs market may remain uncertain for a while longer.”
Luke Bartholomew, Deputy Chief Economist, at Abderdeen said;
“With unemployment ticking up and payrolls declining again, this is yet another soft labour market report. And crucially, from the perspective of the Bank of England and the outlook for inflation, this weakness is continuing to pull down on wage growth. Private sector pay growth in particular has essentially returned to an inflation-target consistent rate, meaning that as and when inflation falls to 2% later this year it is likely to stay there rather than start increasing again. Of course, the inflation data tomorrow could throw a wrench in the works, but for now it seems there is a clear case for a further rate cut at the Bank’s next meeting in March, and we continue to expect rates to fall to 3% later this year.”
onathan Moyes, Head of Investment Research at Wealth Club said:
“The latest unemployment and wage growth data came in weaker than expected.
Whilst the labour market is clearly weakening, and has been weakening since mid 2024, wage growth has been relatively strong. This has been a perplexing situation for economists, particularly those at the Bank of England. Wages have typically been a blocker on additional rate cuts for fears of stoking inflation. Today’s reading on the health of the economy show thr two key metrics, wages and jobs, starting to move in tandem again.
Will the weakness in wages now trigger the Bank of England to look again at its likely path for inflation? Wage growth may be the last domino to fall as inflationary pressures in the economy appear to be melting away. What’s clear is the economy is weak, employment is weak, and it looks like wages are weak.”
George Lagarias, Chief Economist at Forvis Mazars:
“The soft underbelly of the UK economy is emitting a distress signal. It’s not just the relentless rise in unemployment, now at a five-year high. It is also private sector wages that for the first time in two and a half years, are not growing above the inflation rate. Household consumption constitutes over 60% of the economy and these numbers may eventually begin to scare consumers away from purchases. The question for markets and the real economy is whether they are enough to also scare the Bank of England into accelerating much anticipated rate cuts.”
Julia Turney, Partner and Head of Platform and Benefits at Barnett Waddingham (BW) says:
“Sluggish employment figures in December start the new year on challenging footing. With the Workers’ Rights Act now becoming law, employers are prioritising planning and operational resilience over expanding headcount.
“With visa changes also shrinking the pool of overseas talent, retention is becoming more important than ever. In this environment, employee satisfaction will be the battleground for success – and our recent data shows that 82% of business leaders believe employee happiness is critical to productivity.
“Ultimately, employers will need to balance rising cost pressures with the need to engage and retain their workforce – a challenge the most data-driven and innovative organisations will be best placed to lead the way.”
Rob Morgan, Chief Investment Analyst at Charles Stanley, Part of Raymond James Wealth Management, said:
“It’s hard to find a silver lining in the latest UK labour market figures. Unemployment has climbed to 5.2%, its highest since the pandemic era, while total employment has slipped back into decline.
What’s more, the busier Christmas period may have masked deeper cracks, with many firms, particularly in hospitality, warning that the new year has brought an even sharper slowdown.
Wage growth is also losing momentum. Strip out the public sector and adjacent areas, and pay gains are fading rapidly, now firmly aligned with a cooling economy.
What it means for the economy
The jobs market is sending a clear message: employers are nervous, and the broader economy is losing steam after a respectable first half of 2025. Rising taxes and an expanding regulatory load are giving businesses pause for thought, making them more cautious about hiring or replacing staff.
The UK’s underlying economic story is one of struggle rather than resilience. GDP may have grown 1.3% in 2025, but momentum fizzled out in the second half. The services component, the engine of UK growth, has now stalled, while construction and business investment remain notably weak.
What it means for interest rates
With inflation easing, growth at a crawl, and slack building in the labour market, more rate cuts this year look increasingly likely. Another reduction as soon as the March meeting appears firmly on the table – assuming tomorrow’s inflation print delivers a further expected cooling.
And with the UK’s fiscal position constraining the government’s room for manoeuvre, and markets already twitchy about additional debt issuance, the case for the Bank of England to do more of the heavy lifting grows stronger. Even if some inflationary pressures linger, monetary policy may once again become the UK’s main economic shock absorber.”
Kevin Brown, savings expert at Scottish Friendly, has commented:
“This morning’s dip in regular wage growth, now down to 4.2%, marks a clear continuation of the cooling trend that’s been building momentum since last summer.
“Pay growth had already been climbing down from 4.7% since the middle of last year, and a further slowdown in the three months to December bolsters the view that the labour market is losing momentum and that domestic inflation pressures are gradually easing.
“For the Bank of England, that nudges the door further open to rate cuts this year. However, tomorrow’s inflation data will still be decisive in shaping the timing.
“For borrowers, softer wage growth increases the likelihood that interest rates begin to edge lower in the coming months. For savers, this is a potential warning sign. When the Bank of England does decide to make a cut, savings rates can fall quickly and in real terms, inflation still erodes the value of cash over time.
“That makes this a good time to review savings arrangements and, for those with longer-term horizons, to think about investment options that could potentially outpace inflation.”
Danni Hewson, AJ Bell head of financial analysis, comments:
“The surprise jump in unemployment lays bare the weakness in the labour market that’s led to the number of people out of work per vacancy hitting a fresh post-pandemic high.
“Businesses have been crystal clear that government policies which increased labour costs resulted in them pressing pause on their hiring plans, and potentially sped up another change which could have a huge impact on job creation in the years ahead.
“Weaving AI into businesses to increase productivity is a positive move and may be the answer to a decades-old issue. But for young people in particular, already struggling to get their first taste of work, AI could result in a scarcity of entry level posts.
“With more people hunting jobs and the number of jobs being created remaining fairly static, the pressure on businesses to ramp up pay has receded, with wage growth in the private sector hitting a five-year low.
“The gloomy picture painted by recent UK growth figures and today’s evidence of a lacklustre jobs market has increased the likelihood that the Bank of England will cut rates at the next meeting in March. It has also increased expectation that rates could reach as low as 3% by the end of the year.
“As with most economic data, these figures are backwards looking, and the slight uptick in vacancy numbers in the three months to January may suggest the labour market could recover. Cooling inflation and falling interest rates should help boost confidence among businesses and consumers and kickstart a period of renewed growth, especially if the uncertainty which was particularly acute at the end of last year isn’t repeated.”
Emma Wall, Chief Investment Strategist, Hargreaves Lansdown:
“UK jobs data may not have moved the equity market much this morning, but it has ramped up market expectations of rate cuts through 2026. Unemployment rose slightly to 5.2% for the three months to the end of December, according to the Office of National Statistics, and there are more people out of work looking for jobs. Redundancies are also up. The post-pandemic jobs boom is well and truly over, and wage inflation is slowing. We agree with the market that this weakness in data confirms expectations that the Bank of England Monetary Policy Committee will cut rates next month – remember that split vote last time around – but we don’t think it’s bad enough to tilt the Committee to abandon its slow and steady approach. Two cuts through the year is still our base case, given where inflation is and the current trajectory. That said, if jobs data continues to weaken, and is coupled with stagnant or non-existent economic growth, we could see a ramping up of cuts in the second half.”
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