Introduction: UK wage growth slows and unemployment rises as firms react to Iran war
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Unemployment in the UK has unexpectedly increased to a rate of 5%, while wage growth slowed, with businesses squeezed by the war in the Middle East.
The jobless rate rose to 5% in the three months to March, from 4.9% in February, according to the Office for National Statistics (ONS). Economists had expected it to remain unchanged.
The number of people claiming unemployment benefits rose by 27,000 in April, marking the largest increase since July 2024.
Regular wages, excluding bonuses, rose 3.4% year on year in the three months to March, down from 3.6% growth in February, aligning with City forecasts. Including bonuses, pay growth increased to 4.1% from 3.9%. However, after adjusting for inflation, wages grew by just 0.3%.
The Bank of England is closely monitoring pay growth to evaluate how higher consumer prices are influencing the economy. The conflict in Iran has led to a surge in energy prices. Several central bank policymakers believe the slowdown in wage growth since early 2025 will likely continue due to the war’s impact on hiring and the broader economy.
The number of payrolled employees declined more sharply in April, dropping by 100,000 after a revised 28,000 fall in March. April’s decline was the largest since the early stages of the pandemic in May 2020.
Excluding the Covid period, this was the biggest monthly decrease since records began in 2014, stated Martin Beck, chief economist at the economics consultancy WPI Strategy. This left total headcounts 210,000 lower than a year earlier. He added:
"The latest labour market data suggest the UK jobs market is starting to feel the repercussions of higher energy prices, geopolitical uncertainty and weaker business confidence."
The generational divide remains significant. Since payroll employment peaked in October 2024, the number of employees aged 34 and under has fallen by 296,000, while employment among those aged 35 and over has increased by over 18,000. This indicates the slowdown is not being felt evenly, with younger workers continuing to bear the brunt of a cooling labour market.
Vacancies declined again in April to their lowest level in nearly 12 years, excluding the Covid period. They are now approximately 15% below their pre-pandemic level, while the number of unemployed people per vacancy is among the highest since 2020. Employers’ message is clear: firms are becoming more cautious, scaling back hiring plans, and the balance of power in the labour market is shifting away from workers.
Vacancies dropped by 28,000 in the three months to April, reaching 705,000, a five-year low.
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