The UK's labour market has hit a snag, with private employers pulling back from hiring and pay growth slowing down. According to the latest data, pay growth outside the public sector dropped to 2.9 per cent, the lowest level since 2020. This marks a significant decline from the previous period, with payrolls shrinking by 4,000 and vacancies falling for the 11th consecutive month.
The Office for National Statistics reported a small contraction in June, defying City projections of a rise of 20,000 jobs. The unemployment rate remained unchanged at 4.9 per cent for the three months to May. However, the number of vacancies still open across the economy stands at 712,000, down 7,000 from the previous quarter. Smaller firms are choosing not to hire in order to manage their wage bills and costs.
This trend is a familiar calculation in SME finance meetings. When employment costs are fixed and demand is uncertain, the vacancy is the first thing to go. As a result, the labour market appears stable in aggregate, but the hiring freeze among smaller employers is deepening beneath the surface.
Total average earnings growth, including bonuses, slowed to 4.3 per cent from 4.4 per cent in the previous period. The gap between sectors is now stark, with public sector pay running at 5.5 per cent and private sector pay at 2.9 per cent. This disparity is largely due to the timing of NHS pay awards.
The slowing pay growth is causing concern, particularly with inflation poised to rise further in the second half of the year. Economists believe this could complicate the government's plans to help with the cost of living.
There is a paradox in the numbers, with employment in the three months to May actually jumping by 64,000 to just below 34.5 million. The economic inactivity rate also edged down to 20.9 per cent from 21 per cent. However, more people are looking for work at precisely the moment employers are cutting hiring plans.
Firms that can afford to recruit will find the candidate market friendlier than it has been in years. Pay across the economy still rose faster than inflation for the 36th month in a row. Data due on Wednesday is expected to show inflation edged to 2.7 per cent in the year to June, the lowest level since March 2025.
The economy also returned to growth in May, with GDP up 0.1 per cent in the month. However, the ONS has cautioned that its labour market data has been plagued by inaccuracy problems in the past two years.
The labour market picture remains relatively steady, but some measures suggest softening. The number of employees on payroll was broadly flat in the latest month, while survey estimates suggest employment, unemployment, and inactivity rates were little changed in the latest quarter.
The read-across to borrowing costs matters more than the jobs numbers themselves for most owner-managers. Economists believe the health of the labour market will partly determine whether the Bank of England raises interest rates this year to counteract price pressures caused by the Middle East war energy shock.
With the monetary policy committee meeting on 30 July, it is likely that borrowing costs will remain unchanged at 3.75 per cent. However, cooling wage growth is pushing the other way, with firms holding off on recruitment to protect margins doing the Bank's work for it.
