Wage growth in the UK held firm at 5.9% in the three months to February 2025, according to the Office for National Statistics (ONS), adding further complexity to the Bank of England’s monetary policy decisions.
The strong pay figures — driven in part by recent public sector wage settlements and national living wage increases — have reinforced concerns about embedded inflation, despite other indicators pointing to a cooling labour market. March saw a drop of 78,000 payrolled employees, the sharpest decline since the pandemic, while job vacancies fell by 26,000 to their lowest level since mid-2021.
Seemanti Ghosh, Principal Economist at the Institute for Employment Studies, said:
“Vacancies have fallen by a further 26,000 on the quarter and hit a new low, payroll employees have decreased by 8,000 on the month, and unemployment remains relatively flat. Against the backdrop of a slowing economy, marked by weaker productivity growth and dampened business sentiment, and with nearly one in five working-age adults out of the labour force, rolling out the government’s industrial strategy cannot come soon enough.
Initiatives focussing on the expansion of voluntary employment support such as the launch of the new Connect to Work employment scheme and individually tailored support via the proposed Jobs and Career Service are a positive step. But success will be dependent on creating a joined-up system, working closely with employers and taking a long-term approach, and much relies on the economic landscape, with a downturn potentially undermining new policy initiatives.”
Economists including KPMG’s Yael Selfin warn that ongoing policy headwinds — such as higher employer National Insurance contributions — could soon weigh on wage growth. However, inflationary pressure from strong nominal earnings remains a concern for Threadneedle Street, with investors watching closely ahead of the Bank of England’s rate decision in May.
With core inflation still elevated and economic growth fragile, the central bank must now navigate a narrow path — managing inflation expectations without choking off already-weak labour demand.
