UK Employment Sees Sharpest Decline Since Early Covid-19

Recent official statistics indicate that employment in the UK experienced its largest decline since the initial phase of the Covid-19 pandemic, with wage growth reaching its lowest point since September.

Data released by HM Revenue & Customs revealed that payroll employee numbers decreased by over 109,000 in May, marking the most significant monthly drop since May 2020. Year-on-year, payrolls fell by 274,000. This employment decrease followed the implementation of a £25 billion increase in employers’ national insurance contributions that took effect in early April.

Since Rachel Reeves introduced her first budget in October, the payroll employee count has decreased by 276,000, suggesting that the higher employment taxes established during that fiscal policy event led companies to reduce their workforce.

The Office for National Statistics (ONS) reported that wage growth, excluding bonuses, fell to 5.2 percent in the three months leading to April, down from 5.5 percent in the previous quarter, while analysts had predicted a figure of 5.3 percent.

When including bonuses, wage growth decreased to 5.3 percent, dipping from a previous increase of 5.6 percent.

This decline in wages occurred despite a six percent rise in the minimum wage in April. KPMG UK’s chief economist, Yael Selfin, noted that this trend suggests that pay is likely to decrease further in the upcoming year, as ongoing domestic challenges continue to limit workers’ bargaining capabilities.

Unemployment rose to 4.6 percent from 4.5 percent over the last quarter, according to the ONS, marking the highest unemployment rate since 2021. Job vacancies also saw a reduction, declining by 63,000 to a total of 736,000.

The rate of economic inactivity— the proportion of the working-age population neither employed nor seeking work— fell by 0.2 percentage points to 21.3 percent.

These figures may lead to speculation regarding potential interest rate cuts by the Bank of England this year. Investors anticipate that the central bank might reduce borrowing costs once or twice more this year, following a decrease from 5.25 percent to 4.25 percent.

James Smith, an economist at ING, commented on the situation, stating: “The cooling trend within the UK jobs market is becoming more pronounced. Wage growth is also decelerating. Although the threshold for the Bank of England to initiate swift rate cuts seems quite high, this data supports the likelihood of cuts in August and November.” 

Rob Wood, chief UK economist at Pantheon Macroeconomics, remarked, “The labour market appears to be deteriorating in May, potentially prompting the Monetary Policy Committee to consider rate cuts again in August.” 

The British pound fell against the dollar due to expectations of earlier or more frequent rate cuts, decreasing by 0.61 percent to $1.34. The yield on the ten-year government bond also saw a slight drop of six basis points to 4.56 percent, while the FTSE 100 index rose by 0.48 percent and the mid-cap FTSE 250 index increased by 0.40 percent.

Inflation reached 3.5 percent in April, up from 2.6 percent in March, marking the highest rate since January 2024, as the Bank of England aims to stabilize it at 2 percent in the medium term.

In the private sector, salary growth stood at 5.1 percent, down from 5.5 percent, while public sector pay rose to 5.6 percent, an increase from 5.5 percent. The Bank of England closely monitors private sector wage trends for its interest rate decisions.

Liz McKeown, director of economic statistics at the ONS, expressed that the labour market is experiencing notable weakening, with a significant drop in payroll numbers. Insights from vacancy surveys suggest that some companies may be hesitant to hire new workers or replace those who leave.

She further noted, “Earnings growth has slowed in both nominal and real terms, although it remains robust by historical standards. Public sector pay is now increasing at a faster rate compared to private sector wages.” 

On Wednesday, Rachel Reeves is expected to announce government spending plans for the next three years during the spending review, alongside preparing for over £100 billion in investment expenditures for the same period.

The public finances are under pressure due to rising government borrowing costs amid escalating demands for more defence spending. Sir Keir Starmer has already partially reversed his stance on abolishing universal winter fuel payments and seems open to removing the two-child benefit cap.

Upcoming figures on Thursday are anticipated to reveal that the UK economy slightly contracted in April following a 0.7 percent expansion in the first quarter of the year.