Introduction
The United Kingdom is currently navigating a period of significant economic tension, marked by weakening demand for labour and persistently high wage growth. Recent data show headline average earnings inflation slowed to 4.7 percent in the three months to November 2025, a slight decrease from 4.8 percent in the preceding quarter.
However, the unemployment rate has stabilised at 5.1 percent, and the labour force has grown more rapidly than employment itself. This complex environment is compelling policymakers, including the Bank of England, to balance the risks of economic weakness with ongoing inflationary pressures driven by wages.
Key Wage Trends
Average earnings inflation in the UK has cooled slightly, declining to 4.7 percent in the three months to November 2025. This follows an upward revision of the previous quarter’s figure to 4.8 percent. Wage growth is expected to fall below 4 percent in the first quarter of 2026, indicating a modest reduction in pay pressures affecting businesses.
Private sector pay growth has fallen beneath the 4 percent threshold for the first time since November 2020, registering at 3.9 percent. In contrast, public sector wages have continued to rise sharply, reaching 7.8 percent, significantly influenced by base effects from prior periods of lower growth.
Labour Market Activity and Unemployment
Despite still strong wage growth, the labour market is showing signs of cooling. Unemployment stands at 5.1 percent, unchanged over the latest reported period. The labour force participation rate has climbed to 79.2 percent, its highest level since March 2020, when the COVID-19 pandemic first impacted the labour market.
The growth in the labour force has outpaced increases in employment, resulting in upward pressure on the unemployment rate. This pattern suggests a mismatch between available jobs and job-seekers, reflecting subdued demand from employers across several sectors.
Vacancy Rates and Hiring Conditions
The number of job vacancies in the UK continues to decline, although the rate at which vacancies are falling has eased compared to the first half of 2025. Reduced hiring demand, along with broader geopolitical uncertainty, is leading many employers to adopt a cautious approach to recruitment.
Economic analysts have highlighted that the supply-demand imbalance in the labour market is expected to persist in the near term, likely slowing wage growth further as companies reassess their hiring strategies amid volatile business conditions.
Public vs Private Sector Pay
Wage growth trends have diverged notably between the public and private sectors. Public sector earnings, buoyed by recent settlements and base effects, are increasing at an annual rate of 7.8 percent. In contrast, the rate of increase for private sector wages has moderated to 3.9 percent, reflecting broader weakness in demand for labour.
The services sector remains a key driver of overall pay growth, with an annual rate of 4.8 percent. While this represents a decline from recent peaks, elevated earnings in services continue to exert upward pressure on domestic inflation.
Impact on Living Standards
Despite higher wage inflation, workers in the UK have seen incremental improvements in their real incomes. Annual growth in real regular pay now stands at 0.6 percent, with an improvement to 0.8 percent when bonuses are included.
This growth suggests that employees are gradually recovering some of the purchasing power lost during previous periods of high inflation. However, analysts caution that wage increases continue to outpace productivity growth, resulting in sustained pressure on corporate margins and potentially limiting the ability of firms to invest or expand their workforce.
Final Summary
In summary, the United Kingdom’s labour market is facing a dual challenge of weak demand and elevated wage growth. Unemployment remains at 5.1 percent as more individuals seek work than there are job opportunities available, while wage inflation particularly in the public and services sectors continues to place upward pressure on prices.
As the Bank of England deliberates its next steps, the balance between controlling inflation and supporting the real economy grows ever more delicate.
The evolving situation will continue to have meaningful consequences for businesses, workers, and policymakers. For ongoing updates and data insights, professional users may wish to explore the Pie app for further labour market and wage trends.
