Britain’s labour market cools at the edges

Britain’s labour market has not turned in one dramatic move, but the latest figures suggest a steady loss of confidence at the margins. The latest figures from the ONS put unemployment at 5.0% in January to March, up 0.5 percentage points on the year, while vacancies fell to 705,000 in February to April, their lowest level since early 2021. Pay growth has also slowed sharply. Regular earnings rose by 3.4% in the three months to March, the weakest annual increase since 2020, while real regular pay growth, measured against CPIH, was only 0.1%.

That broad national picture, however, only starts to make sense when the pressure points are examined more closely. The pullback is not evenly shared across the economy. It is showing up first among smaller employers, and in the lower-paid, consumer-facing sectors that tend to cut back sooner when demand softens and costs rise. ONS said the largest quarterly falls in vacancies came in wholesale and retail, down 7,000, and accommodation and food services, down 6,000. Over the year to April, payroll employment fell by 76,000 in wholesale and retail, while accommodation and food services recorded the steepest percentage decline, down 3.4%.

Those sectors have been under pressure for some time, but the recent combination of higher wage floors, changes to employer National Insurance, and renewed geopolitical instability has made the hiring decision more difficult. The Bank of England’s agents said in April that employment intentions were “broadly flat”, and while the Middle East conflict was being reported as a risk to hiring, it was “not yet material”. Even so, the same summary pointed to a clear divide between sectors. Some business services companies were still planning modest headcount increases, often linked to technology and AI capability, while consumer services contacts were expecting further reductions as weak demand, high labour costs, and digitalisation curbed recruitment.

The sharpest signal in the vacancy data comes from smaller businesses. Employers with 1 to 9 staff accounted for 19,000 of the overall 28,000 quarterly fall in vacancies, while businesses with 10 to 49 employees saw the largest annual decline. In practice, that means the hiring retreat is being led by the part of the economy that often absorbs uncertainty first and has the least room to carry extra cost. Although larger companies can delay projects or redistribute work, smaller employers are often making more immediate decisions about whether a role is still affordable.

That concern runs straight through the CIPD’s latest employer survey. Its spring Labour Market Outlook found that cost management had overtaken growth, productivity, and workforce expansion as employers’ main priority, and that expected basic pay awards remained fixed at a median 3% for the eighth consecutive quarter. Responding to the ONS figures, James Cockett, senior labour market economist at the CIPD, said: “The fall in vacancies in the last year is almost entirely driven by falling vacancies among SMEs, the backbone of the UK economy.”

He added that “pay growth has fallen to its lowest level since the pandemic with real pay growth teetering just above zero.” Those two points sit close to the centre of the story. Employers are not only hiring less; many are also reaching the limit of what they can comfortably offer on pay.

There is a striking contrast in the background. First-quarter GDP was estimated to have grown by 0.6%, and services output helped support that rise, yet parts of the jobs market that usually reflect everyday business confidence are weakening. Growth can continue for a while even as hiring slows, especially if companies lean harder on productivity, technology, or tighter staffing. It is not the picture of a market in which employers feel relaxed about adding new people.

Pay figures reinforce that sense of restraint. In the private sector, regular pay growth slowed to 3.0%, barely ahead of inflation, and far below the rates seen when employers were still competing hard to attract and retain staff. The gap between nominal pay growth and living costs has narrowed to the point where it offers little buffer either to workers or to businesses trying to defend spending power without pushing up their wage bill too far. For households, the squeeze has not gone away. For employers, the capacity to solve recruitment problems through pay alone has weakened.

In response to the figures, Naomi Clayton, chief executive of the Institute for Employment Studies commented: “The UK labour market remains weak. Vacancies have fallen to their lowest level since early 2021, early estimates suggest payrolled employment has dropped sharply and real pay growth has slowed to a standstill.”

Her warning on youth employment is especially difficult to ignore: “While unemployment is at 5%, the youth unemployment rate remains nearly three times higher.” The most recent Commons Library briefing, published in April, put youth unemployment at 15.8%, with 713,000 people aged 16 to 24 unemployed.

The consequences are already visible in the parts of the economy most likely to offer first jobs, part-time roles, and stepping-stone employment. Retail, hospitality, and other lower-paid service sectors play a disproportionate role in taking on younger workers, first-time jobseekers, and those moving between roles. When vacancies fall there first, the effects rarely stay contained. They feed into school-leaver prospects, apprenticeship routes, part-time work, and the capacity of smaller local businesses to keep offering entry points into employment. The government has already responded with a £1bn package intended to support young people into apprenticeships and training, but the latest labour-market data suggest the challenge is no longer abstract.

So while Britain’s jobs market is not in freefall, it is plainly less forgiving than it was. Fewer vacancies, weaker payrolls, flatter pay growth, and greater caution among smaller employers all point in the same direction. The edges of the market are cooling first, and when that begins with SMEs, retail, hospitality, and younger workers, it is usually a sign that caution has moved from sentiment into day-to-day hiring decisions.