The unemployment rate is projected to rise to 5% by the end of the month (Image: Getty)
The UK's labour market is showing fresh signs of strain, with a leading think-tank forecasting the unemployment rate will climb to 5% by the end of August, which is the highest level since the UK emerged from COVID-19 lockdowns in early 2021. New analysis from the Resolution Foundation, an independent think-tank, highlights a rapid weakening in the jobs market, driven by a slowdown in hiring and a rise in economic inactivity. The Resolution Foundation’s latest Labour Market Outlook draws on multiple indicators to provide a more comprehensive view of employment trends amid ongoing challenges with official data from the Labour Force Survey (LFS).
While the official unemployment rate stood at 4.7% in the second quarter, the Foundation’s forecast, which uses recent figures on payroll jobs, vacancies, wages, and surveys, suggests that unemployment has continued to rise and is on track to reach an estimated 5% in the three months to August. This forecast surpasses the Bank of England’s own prediction of 4.9% unemployment by the end of 2025 and signals a labour market that is loosening more rapidly than expected.
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The Bank’s recent forecasts had predicted a peak unemployment rate of around 4.9% (Image: Getty)
The think-tank also noted that economic inactivity, a key focus for policymakers, has increased to around 21%, reversing previous trends that showed a decline.
Over the past two years, inactivity is estimated to have risen by about one percentage point, contradicting official data which suggested a fall.
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A crucial factor behind these developments is a widespread hiring freeze among employers, rather than a surge in layoffs.
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Many businesses have pointed to government policies, including Chancellor Rachel Reeves’ decision to raise employer national insurance contributions and increase the national living wage, as contributing to their cautious approach to recruitment.
As a result, while job losses remain relatively contained, fewer vacancies mean tougher conditions for jobseekers and new entrants.
Despite the labour market’s softness, wage growth remains resilient, with pay rising around 5% recently, a rate higher than models would predict given current employment conditions.
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Gregory Thwaites, Research Director at the Resolution Foundation, told the Financial Times: "Our alternative unemployment rate – based on a wide range of labour market data – indicates that unemployment has not yet peaked.
"While our analysis confirms that official measures of unemployment are accurate, it worryingly indicates that economic inactivity has been on an upward trajectory for the past two years, contradicting earlier analysis.
"The ongoing loosening of the labour market appears to be taking the form of a hiring freeze rather than a firing spree, but this is still bad news for job-seekers as vacancies look set to continue being scarce."
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