Wage growth in the UK has taken a steep dive, the latest data from the Office for National Statistics (ONS) shows.
Average earnings grew at just 3.8% in the three months to January 2026, their slowest rate in more than five years, raising urgent questions about household purchasing power at a moment when unemployment is already at its highest level since 2020.
The ONS Labour Market Overview for March 2026 shows UK unemployment held at 5.2% in November 2025 to January 2026, up 0.1 percentage points on the previous quarter and 0.8 percentage points higher Year-on-Year (YoY), comparing the same three-month period in 2024.
According to the ONS Labour Force Survey, 1,869,000 people are currently out of work. All age groups saw annual increases in unemployment, with youth unemployment a particular concern: the number of 16-24-year-olds classified as not in education, employment or training (NEET) reached 960,000 in the final quarter of 2025, up from 830,000 three years earlier, according to the Institute for Fiscal Studies.
Liz McKeown, director of economic statistics at the ONS, noted that “regular wage growth is at its lowest rate in more than five years, with pay growth in both the private and public sectors continuing to ease.” The fall from 4.2% in the previous period to 3.8% has been sharper than City economists had forecast, with workers’ earnings technically rising above inflation, but only just.
Vacancies remain under pressure too. There were an estimated 721,000 job openings in December 2025 to February 2026, down 9.5% compared with the same period a year earlier (December 2024 to February 2025) and now below the pre-pandemic baseline. It means 2.6 unemployed people are now competing for every available vacancy, up from 1.9 a year ago: a measure of how quickly the balance of power in the jobs market has shifted away from workers. On a more positive note, the employment rate edged up 0.2 percentage points to 75.1% in the quarter, and the economic inactivity rate fell to 20.7%, down 0.3 percentage points, offering limited grounds for cautious optimism.
Two very different bets ahead of April
What makes these figures particularly striking is the contrast they create with conditions on the ground for small businesses (SMEs), many of which are currently making some of the most significant hiring decisions they have faced in years, against a backdrop of rising costs, incoming employment legislation, and deepening geopolitical uncertainty.
Employment Hero’s February Jobs Report, tracking 120,532 SME employees across 4,574 businesses, shows overall SME wage growth running at 8.8% YoY, up sharply from 5.6% in January, and more than double the private sector rate recorded by the ONS. It reflects just how intensely SMEs in certain regions are competing for staff. But zoom in regionally and the picture fractures into two distinct strategies, shaped by anxiety about what April’s Employment Rights Act measures will cost alongside the broader economic pressures facing UK businesses.
Northern SMEs posted 12.5% annual wage growth in February, the highest in the country, yet expanded headcount by just 0.5% YoY, largely due to paying a scarcity premium to retain the staff they already have, rather than risk bringing in new people ahead of new legislation. Eastern businesses, by contrast, grew headcount by 17.4% YoY while paying 11.9% more in wages, racing to build teams before hiring gets more complex and more expensive. London, once the engine of UK wage growth, has stalled at 4% annually, with figures suggesting wages were flat or falling through much of 2025 before a recent pickup.
The ONS’s regional unemployment data helps explain why. London’s unemployment rate has hit 7.9%, a 12-year high, with 416,000 adults out of work in the capital, far above the national rate and higher than any other UK region. It also shows the number of unemployed 16-24-year-olds in the capital rose by 10,000 (from 125,000 to 135,000) between October-December 2025 and November 2025 to January 2026, making it the region with the highest rate of youth unemployment.
As Employment Hero’s February Jobs Report analysis noted earlier this month, neither the North’s retention strategy nor the East’s expansion strategy is without risk, however. Northern businesses have committed to wage levels they may struggle to sustain. Eastern businesses are simultaneously hiring aggressively and paying significantly more for staff. And the ONS Business Insights and Conditions Survey found 36% of businesses with over 10 employees now name labour costs as their single biggest challenge.
What businesses are actually worried about
The Employment Rights Act is the common thread running through much of that hiring anxiety, but it’s far from the only pressure businesses are navigating. Measures including changes to Statutory Sick Pay thresholds, new day-one rights, the arrival of the Fair Work Agency, and expanded protections around zero-hours contracts all create compliance demands that fall disproportionately on smaller businesses without dedicated HR or legal resources.
At the same time, the National Minimum Wage is rising to £12.71 an hour from April, adding directly to the cost base of businesses already running thin margins, and geopolitical-related energy costs are continuing to rise. For businesses in sectors like hospitality, retail, and logistics, where energy and labour represent the largest cost lines, the cumulative pressure is considerable.
Kevin Fitzgerald, UK Managing Director at Employment Hero notes that “today’s ONS employment data underlines the importance of giving businesses the certainty and flexibility needed to support job creation”.
He adds: “For many employers, operating costs have risen dramatically in recent weeks due to ongoing geopolitical instability. At the same time, competition for talent remains high as workers continue to feel the impact of the cost-of-living crisis.”
“This pressure has been compounded by the incoming Employment Rights Act reform. Measures such as day-one rights and stricter rules around predictable working are already beginning to shift hiring behaviour. For many SMEs, the increased risk and administrative burden associated with hiring, especially flexible or part-time roles, may lead to slower job creation.”
Work and Pensions Secretary Pat McFadden, meanwhile, had a relatively positive outlook on the ONS update, saying that while there’s “more to do to get people, particularly young people, into work”, the figures are “encouraging” because there are “388,000 more people in work” compared to last year.
The Government’s answer: incentives for youth hiring
The Government’s expanded Youth Guarantee scheme, is a timely, albeit small-scale, remedy for some of the challenges SMEs are facing. The package combines a £3,000 Youth Jobs Grant, a fully-funded Jobs Guarantee for the long-term unemployed, and a £2,000 apprenticeship subsidy for SMEs.
However, the British Chambers of Commerce has forecast overall unemployment will rise to 5.5% this year, telling MPs that rising National Insurance contributions and minimum wage costs “have put young people at the back of the queue when employers consider recruitment.” The British Retail Consortium has also raised concerns that certain provisions of the Employment Rights Act, in particular the right to guaranteed hours, which would limit employers’ ability to offer the flexible arrangements that some young retail workers prefer, risk doing more harm than good.
The scale of the challenge
Independent analysis from the Institute for Fiscal Studies provides a useful reality check on the scale of ambition. The Jobs Guarantee reduces the six-month cost of hiring an eligible young person by 86%, but the IFS notes that even if all 50,000 annual subsidised placements resulted in jobs that would not otherwise have existed, the NEET rate would fall only from 12.8% to 12.1%, still well above the 11.2% seen in 2019.
Today’s ONS release confirms what many business owners already felt: unemployment is at a five-year high, real wage growth for the wider economy is barely positive, vacancies are below pre-pandemic levels, and the most significant wave of employment legislation in a generation arrives in weeks. What businesses need now is for that momentum to continue, with implementation that gives employers, particularly smaller ones, the breathing room to keep hiring with confidence.
