Rising unemployment, falling payrolls and a slowdown in private sector pay growth all paint a picture of continued UK labour market loosening. Autumn Budget uncertainty and concerns over the government’s Employment Rights Bill have both weighed on hiring of late. However, with the Budget now behind us and certain measures of the Bill watered down, employment growth should pick up. In any case, weakening employment, slowing pay growth and the drop in inflation ahead means the Monetary Policy Committee (MPC) is almost guaranteed to cut interest rates this week. Further ahead, we think the MPC would need to see more weakening in the jobs market next year to be convinced to take rates below 3.5%.

Autumn Budget uncertainty dampens UK labour market

Starting with the latest official employment figures from the Labour Force Survey (LFS), the UK unemployment rate rose to 5.1% in October. Employment also fell by 16,000 in the three months to October. That said, we interpret this data with caution because the LFS continues to be distorted by a low response rate.

However, LFS data is now pointing in the same direction as HMRC payrolls statistics. These show employment fell by 38,000 in November. October was revised up from -32,000 to a still poor -22,000. November’s decline was driven by a 24,000 fall in retail and wholesale sector headcount, which suggests the impact of April’s big rise in employment costs continues to impact hiring decisions.

The weakness isn’t entirely concentrated in the private sector. One proxy measure for public sector payrolls, which includes education, healthcare and public administration, has been falling since August and accounts for around half of the payrolls measure’s weakness over this period.

Reading the LFS and HMRC datasets together, we therefore think the weakness in the labour market in the months leading up to the Autumn Budget was genuine. Uncertainty ramped up over the government’s fiscal plans and the passage through parliament of the Employment Rights Bill. Given the government’s rowed back on certain aspects of the Bill and the Budget was more benign than feared, we should see a slight pickup in hiring going forward.

Slowing pay growth rubber stamps rate cut

Turning to wages, private sector regular pay growth – the measure most relevant to the MPC because it’s most reflective of underlying inflationary pressure – eased down in October to 3.9% from 4.2%. This keeps the data on track to meet the MPC’s call of 3.5% in December. Alongside weak employment numbers, the pay data also nails on a rate cut on Thursday, if it wasn’t already.

However, total pay growth remains robust at 4.7%, due to public sector pay rising to 7.7% from 6.8%. The ONS cautioned that some public sector pay rises happened slightly earlier in 2025 than in 2024, creating a base effect, which means public sector pay should fall back quickly. In any case, whole-economy pay growth is still too high for the MPC to relax. This will limit its ability to cut rates further next year.

The big picture is that the UK labour market continued to loosen materially in the months leading up to the Budget. Weaker private-sector pay growth has helped to reduce the risks to inflation. Inflation will also drop sharply at the start of next year, setting the stage for the MPC to provide an early Christmas present on Thursday, before cutting once more in 2026. Further ahead, we think the MPC would need to see the current pace of weakening in the labour market persist into the first half of next year to be convinced to cut rates below 3.5%.

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