UK unemployment rose to 4.5% in March, with job vacancies continuing to ebb and wage growth slowing. But the loosening of the labour market is only gradual and so is likely to see the Bank of England continue with its "gradual and cautious" cuts to interest rates.
The official ILO unemployment rate was 4.5% in the three months to March 2025, the Office for National Statistics revealed on Tuesday, up from 4.4% a month earlier and the highest since the summer of 2021.
Average weekly pay grew 5.6% in the three-month period, down from 5.7% in the three months to February. This was still above CPI inflation, which was 2.6%.
Vacancy numbers fell to 783K in the three months to March from 801K in February, the lowest since April 2021 amidst a continuing gradual decline, now 34,000 below pre-Covid levels.
HMRC payroll data shows employee numbers fell by 33K month-to-month in April, down from a 47K fall in March, which was revised up from an estimated 78K fall.
"Ever since last year’s Budget shocked employers with a chunky increase to national insurance, businesses have been warning that increased labour costs would impact their ability to hire and retain staff," said Danni Hewson, AJ Bell head of financial analysis.
The ONS figures show those warnings had some merit, though with the cooling of inflation she notes that "the pressure on businesses to deliver substantial pay increases in order to keep skilled staff happy has fallen back, and as the labour market continues to loosen this year’s pay deals are likely to look very different from those given over the past couple of years".
In the early HMRC payrolls estimate, Hewson says it is "probably no surprise that the labour-intensive food and accommodation sectors have been the hardest hit. Consumers have been nervous of spending, even if the sunshine did tempt them onto the high street and into bars and restaurants over the past few weeks.
"Donald Trump’s tariff flip-flop has also dented both consumer and business confidence," she said, though Washington has since begun to strike some trade deals.
Economist Rob Wood at Pantheon Macroeconomics said the labour market continuing to "ease gradually" justifies further interest rate cuts from the Bank of England's monetary policy committee.
"There is enough here for the MPC to justify further rate cuts," Wood said. "Rate setters will likely be particularly attentive to vacancies continuing to fall and now suggesting that the labour market is loose."
But he also sees enough to justify the MPC continuing with its "gradual and cautious" approach to rate cuts, with PAYE median pay growth still strong and early indicators suggesting the worst of the payroll tax driven labour market shake-out is past.
While the collapse in March payrolls was revised up, April’s month-to-month payrolls "leaves a picture of employment falling now", he said.
January-March 2025 Labour Force Survey data from the ONS "should be more reliable because they reflect the full effect of improved ONS data collection introduced a year ago", he added.
"Importantly, LFS jobs include the self-employed who are excluded from payrolls and are likely rising rapidly in number after Chancellor Rachel Reeves’ tax changes, so payrolls probably underestimates job growth. The upward creep in the LFS unemployment rate to 4.5% in March matches the broad picture of an easing labour market."
However, Wood thinks that April "reflects the low point for job growth as firms finished the major adjustments to workforces ahead of payroll tax hikes in early April", with official redundancies falling to 110K in March from 117K in February and 124K in January.