Unemployment rose and wage growth slowed in the three months to January as the UK labour market showed signs of weakness, reflecting a broader slowdown in the economy.
The unemployment rate rose unexpectedly to 3.9 in January from 3.8% in December according to the Office for National Statistics, while annual average wages growth including bonuses fell to 5.6% from 5.8% in the previous month.
City economists had expected unemployment to reman flat and pay growth to slow to a more modest 5.7%. Pay without bonuses also ticked lower, to 6.1% from 6.2% over the same three-month period.
Employers cut back on hiring new staff, pushing the number of advertised vacancies down on the quarter by 43,000 to 908,000, indicating that the recession during the last six months of 2023 took a slightly bigger toll on the labour market than first estimated.
The Bank of England has waited to see signs that wage growth is slowing before making a move to reduce interest rates, and is expected to view the latest figures as another reason to begin that process this year.
However, more recent surveys have shown UK businesses regaining confidence in the economic outlook and preparing to raise prices as employees continue to receive pay rises above the rate of headline inflation, which is now 4% – still double the Bank of England’s 2% target.
A rise in the number of people leaving the labour market, mostly due to ill-health, will also likely mean that employers struggle to find staff and wages growth falls slowly over the coming months.
Tony Wilson, the director of the Institute for Employment Studies, said: “In all, there are well over half a million more people out of work than before the pandemic began. This is being driven by more young people and older people outside the labour force, and in particular because of more people reporting long-term health conditions that stop them from working.
“In our view this is holding back the recovery as the economy is continuing to create jobs, with nearly a million unfilled vacancies reported today.”
The chancellor, Jeremy Hunt, said the figures showed his plans to increase incomes were working.
“Our plan is working. Even with inflation falling, real wages have risen for the seventh month in a row. And take home pay is set for another boost thanks to our cuts to national insurance which in total are putting more than £900 a year back into the average earner’s pocket,” he said.
Wilson said the rise in inactivity meant the government needed “a different approach to how we reach and engage with people who are out of work and may want to come back to work”.
He added: “In particular our employment services need to be more accessible, inclusive and supportive. Employers need to play their part too, and do more to keep people in work and to open up opportunities for those who may need more support.”
