The UK labour market continued to loosen at the end of 2025. The latest data shows payrolls dropping again in December, while the unemployment rate held steady in November. We expect these trends to continue into the next few months before the start of some labour market recovery. Vacancies are already rising, while modest economic growth will support jobs. With little sign of a collapse in the UK jobs market − and with inflation and pay growth yet to fall − the Monetary Policy Committee (MPC) will probably wait until April before cutting interest rates again. However, the jobs market can turn quickly, so risk is skewed towards a deeper weakening.

UK labour market weakening, but positive signs

Starting with the official employment figures, the unemployment rate held steady at 5.1%, despite unemployment rising by 103,000. Employment grew by 82,000 to offset this, helped by August’s drop in employment falling out of the three-month measure. Inactivity also dropped by 94,000 to keep the unemployment rate stable.

This official data therefore suggests the UK labour market largely held up ahead of the Autumn Budget, despite the uncertainty. However, these figures are from the Labour Force Survey (LFS), which is still hampered by a low response rate. It means we interpret these figures with caution and turn to a broader set of indicators, like HMRC payrolls data, to get the bigger picture.

Here, payrolls fell by 43,000 in December. November’s drop was revised up a little to 33,000 from 38,000, suggesting a weaker jobs market than the LFS data does. What’s more, much of the recent fall was focused in sectors like retail and hospitality, which were hardest hit by the rise in employment costs last April.

However, payrolls are prone to heavy revisions and adjustment to the rise in employers' National Insurance Contributions (NICs) should be all but complete. Of the 144,000 drop in payrolls since April, over half has come in the last two months. This means most of the recent weakness could be temporary and therefore revised away with time.

More positively, vacancies increased for the third consecutive month as employers gradually resume hiring. We expect this to gain a bit more momentum now the Budget is behind us.

Taken together, the data suggests a labour market that is weak, but starting to stabilise. We expect the labour market to loosen a bit more in the near-term, before recovering through the rest of 2026.

UK pay growth too strong for MPC to relax

Turning to pay growth, private sector regular pay growth – the measure relevant to the MPC because it reflects underlying inflationary pressures most – eased in November to 3.6% from 3.9%. That keeps the data on track to meet the MPC’s call of 3.5% on this measure in December. That said, whole-economy pay growth continues to be far stickier. It fell only a little to 4.7% from 4.8% as strong public sector pay growth (7.8%) added upwards pressure.

In any case, pay growth is still running above the 3% level the MPC thinks is consistent with inflation stabilising at 2%, which limits the MPC’s ability to cut rates further. Instead, we think the Committee will prefer to wait until April before cutting again, which is when pay growth and inflation are likely to have stepped down a little more.

Ultimately, the jobs market loosened further in the final months of 2025, despite mixed signals from some of the data. We expect this trend to continue in the coming months before a gradual recovery over the rest of the year as lower uncertainty, modest growth and no further planned employment-tax hikes all support a hiring recovery. However, given the current risk landscape there’s still a possibility the UK labour market takes a sharp turn for the worst – as has happened in the past – which leaves the risks skewed to the downside.

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