A Trades Union Congress (TUC) analysis shows the UK is experiencing the fastest-rising unemployment among 38 of the world's richest countries. All UK regions faced rising unemployment and fewer job vacancies in the first three months of the year, highlighting a significant mismatch between employers' needs and the available skills. Figures from the Office for National Statistics (ONS) are expected to show a further rise in unemployment.

The UK economy grew by 0.6% in the first quarter, and business and consumer confidence is rising, yet many employers plan to reduce headcounts. A survey conducted by the Chartered Institute of Management (CMI) revealed that 35% of UK organisations plan to freeze or reduce recruitment in the next six months, up from 24% last year and 15% in the summer of 2022.

Factors

Several factors contribute to these employment reduction plans. Among surveyed organisations, 60% cited worsening revenues or rising costs, 55% mentioned organisational restructuring, and 34% pointed to economic uncertainty. Additional factors include higher staff pay and increased automation. Public sector employers are likely to reduce staff due to budget cuts.

The latest ONS figures report a decline of 26,000 to 898,000 in job vacancies, reflecting the broader trend of rising unemployment. Despite the economy's growth, rising unemployment and reduced job vacancies signal underlying issues in the labour market.

The research will heighten concerns among some Bank of England (BoE) policymakers regarding the fragility of the long-term economic outlook. The Bank's monetary policy committee will soon decide whether to drop interest rates from their current level of 5.25%. Given the current economic landscape, the decision will be crucial in addressing the employment crisis.

Wages growing but unemployment rising

In the three months to April, the UK's unemployment rate surged to its highest level since September 2021, reaching 4.4%. Despite this rise in unemployment, wage growth remains strong. Regular earnings have increased at an annual pace of 6%, unchanged from the previous month. Pay increased by 2.9% annually when adjusted for inflation, the highest since August 2021.

The rise in wages is partly attributed to the April increase in the National Living Wage, which went up by 9.8% to £11.44 per hour for those aged 21 and over. This wage increase has contributed to the strong wage growth figures, even as unemployment rises.

The inactivity rate also increased, indicating the percentage of working-age people not actively seeking work. It reached its highest level in nearly a decade at 22.3%, equating to over nine million people. Long-term sickness has become the primary reason for economic inactivity since 2022. This growing inactivity rate poses another challenge to the labour market and the broader economy.

Worker shortages

Despite the strong wage growth, concerns over worker shortages impacting the UK economy persist. Employer payroll numbers dropped by 36,000 between March and April, with a continued decline in May. Additionally, job vacancies fell by 9,000 to 904,000, further evidencing the issues in the labour market.

The BoE will closely examine this data to inform the timing of its first interest rate cut since the pandemic. Policymakers face the difficult task of balancing the need to support economic growth by addressing rising unemployment and worker shortages.

Looking ahead

The current economic scenario presents a complex challenge for the UK government and policymakers. While the economy shows signs of growth, the labour market struggles with rising unemployment, fewer job vacancies, and increased economic inactivity. Employers' plans to reduce headcounts, driven by worsening revenues, rising costs, and economic uncertainty, further complicate the situation.

The strong wage growth, driven partly by the increase in the National Living Wage, provides some optimism. However, this growth is not enough to offset the broader issues in the labour market. The decline in employer payroll numbers and job vacancies highlights the need for targeted interventions to address the mismatch between employers' needs and the available skills.

As the BoE's monetary policy committee prepares to decide on interest rates, the focus will be on finding the right balance to support the economy while addressing labour market challenges. The government's ability to navigate these complexities will ensure long-term economic stability and growth.

The UK faces a dual challenge of managing economic growth while addressing rising unemployment and worker shortages. The coming months will be critical in determining the effectiveness of policy measures and the resilience of the UK's labour market and the broader economy.

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