Minimum wage increases at the least rapid rate since year 2021
In the heart of mid-2025, the UK labour market showcases a robust wage growth, coupled with a softening but resilient jobs market. Amid rising concerns about redundancies, higher taxes, and skills shortages, annual wage growth remains strong, with average regular earnings rising around 5.0%-5.5% year-on-year[1][2][3][4]. However, employment figures reveal a subtle weakening, with payrolled employees decreasing by approximately 0.5% year-on-year, amounting to around 149,000 fewer jobs[2][4].
Job vacancies are falling across most sectors, reflecting a cooling demand for labour and indicating employers' cautious stance amid economic uncertainty[2][4]. This points to a labour market that is struggling but not collapsing, with redundancies rising modestly alongside a persistent challenge of skills shortages in certain roles[4].
The Bank of England faces a "stagflation quandary": balancing ongoing inflation concerns with weakening labour demand and elevated wage growth[4]. The Monetary Policy Committee's recent decisions reflect this tension, having held interest rates steady after a knife-edge vote in August 2025. Interest rate changes are significant because higher rates raise borrowing costs, potentially increasing business expenses and contributing to slower hiring or layoffs. Conversely, any rate cuts would aim to stimulate growth but risk fuelling inflation further[1][4].
Looking ahead, the upcoming Autumn Budget and ongoing interest rate decisions will be crucial. The Autumn Budget may address fiscal concerns around higher taxes and public spending, which could impact disposable incomes and business costs, potentially influencing employment and wage dynamics. It will likely be scrutinized for measures to alleviate skills shortages, support workforce training, and manage reductions in vacancies[4].
The permanent placements index for July was 40, below the 50-figure benchmark for neutrality in employment growth. London and the South of England saw the steepest reduction in permanent placements of any region in the UK[6]. Separate research by accountancy firm BDO shows its employment index at its lowest level in 13 years, with limited room for recovery[7].
Temporary pay inflation has also eased, according to analysis of S&P Global purchasing managers' index (PMI) data. Businesses are becoming more nervous about the Employment Rights Bill and difficulties in managing higher employers' national insurance contributions (NICs)[8]. The jobs market could see a turnaround, but speculation ahead of this year's Autumn Budget risks forcing bosses to delay investments[9].
An interest rate cut by the Bank of England suggests concern over the slump in demand[4]. Scott Knight, head of growth at BDO, states there are signs of recovery, but they are fragile[10]. The drop in vacancy levels was sharper in July compared to previous months[6]. Starting salary inflation in the UK economy has slowed down to its lowest level since March 2021[6].
The engineering sector experienced an increase in permanent placements last month[6]. However, the retail and hospitality sectors have suffered further drops in permanent placements[6]. Kate Shoesmith, REC's deputy chief executive, suggested further interest rate cuts are needed to boost jobs across the UK economy[11].
In summary, the UK labour market is gradually cooling without a full downturn yet. Policymakers face a delicate balance amid inflation, wage pressures, and skills gaps[1][2][4][5]. The Autumn Budget's impact on taxes and workforce policy will be pivotal for the labour market outlook, while business leaders wait for clearer signals from the government before making further investments.
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