UK firms cut jobs at fastest pace in five years, wages cool

[LONDON] UK firms cut jobs at the fastest pace since 2020, and wage growth eased to its lowest in three-and-a-half years, more signs of a weakening job market as the Bank of England (BOE) considers how much further it can cut interest rates.

The tax data showed the number of employees on payrolls falling by 43,000 in December, the month after Chancellor of the Exchequer Rachel Reeves’ tax-raising Budget, the Office for National Statistics (ONS) said on Tuesday (Jan 20). 

The decline was double market expectations and the largest since 2020, though the figures are often heavily revised. Based on the ONS Labour Force Survey, unemployment held at a near five-year high of 5.1 per cent in the three months to November. 

The labour market is a key focus for the BOE policymakers, who have warned in recent weeks that the downturn may be worsening, amid evidence that firms are turning to cutting jobs rather than just holding off hiring. 

The latest data show that payrolls have plunged by 220,000, since Reeves ramped up employment costs in her first Budget in October 2024. However, the financial markets are only fully pricing in one more rate cut this year, with a roughly 70 per cent chance of a second cut.

The pound pared earlier gains to trade at US$1.3429. The rate bets were also largely unchanged, with markets seeing little prospect of a cut in borrowing costs in February or March. 

The pay growth, excluding bonuses, cooled to 4.5 per cent in the three months till November, down from 4.6 per cent in the period to October and in line with forecasts.

While regular private sector pay growth fell sharply for the three months to November, down at 3.6 per cent from 3.9 per cent in three months to October, public sector pay surged 7.9 per cent. This is the highest public sector pay growth in at least 24 years.

Suren Thiru, economics director at the Institute of Chartered Accountants in England and Wales, said: “Though these discouraging figures will reinforce fears among policymakers over the health of the economy, the speed at which the job market is deteriorating is unlikely to be enough to trigger an interest rate cut next month.”

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The health of the job market is seen as crucial to determining the scale and speed of interest-rate cuts in 2026. A lacklustre economy, a higher minimum wage, tax hikes and artificial intelligence have all helped to dampen the demand for UK workers.

There were signs that firms are becoming more proactive in cutting jobs, fuelling concerns that the downturn is getting worse. 

• The redundancy rate climbed to 4.9 in 1,000 employees in the three months till November, up from 3.8 in the three months till August.
• Firms in Britain revealed a further 21,192 potential redundancies in December alone, the highest for the month in at least six years, including the pandemic.
• The single-month unemployment measure went up at 5.3 per cent, the highest since December 2020.
• However, there was a 10,000 increase in vacancies to 734,000 in the three months till December, against July to September 2025.
• Headline pay growth remains elevated due to strong public sector pay increases. However, this support is likely to fade in the next few months, when last year’s settlements drop out of the comparisons.
• Labour disputes cost the UK an estimated 155,000 working days in November, the highest number since January 2024. Over half of the working days lost in the health sector were due to doctors’ strikes in England.
• Youth unemployment increased to 13.7 per cent in the three months to November, the highest since 2020. The situation is particularly dire for young men, among whom jobless rate reached 16.4 per cent.
• Nearly a quarter of jobless individuals have been out of work for more than a year, up from about 20 per cent a year before.
• Unemployment rose by 103,000 to 1.84 million in the three months to November, against the preceding quarter, but employment also rose by 82,000 to 34.3 million. The increase in both measures appeared to be driven by demographic changes, as the fall in inactivity over the quarter was just 51,000, as more people sought work.

Some rate-setters believe that the wage growth is not coming down fast enough to let up in the fight against inflation.

Early feedback, from the network of agents who feed on-the-ground information to the BOE, suggests that businesses will hand out wage rises of 3.5 per cent this year, levels that are not consistent with its 2 per cent inflation target.

Ashley Webb, UK economist at Capital Economics, said: “While the labour market remains soft, the stability of overall pay growth in November diminishes the chances that the BOE will cut interest rates from 3.75 per cent now to 3.5 per cent at the next policy meeting in February.” BLOOMBERG