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UK payrolls see biggest drop since covid as wage growth slows and job market weakens

by June 10, 2025
June 10, 2025
UK payrolls see biggest drop since covid as wage growth slows and job market weakens

The UK labour market suffered its sharpest decline in payroll employment since the height of the Covid-19 pandemic, according to the latest official data, with wage growth cooling and job vacancies continuing to fall.

Figures from HM Revenue & Customs revealed that the number of payroll employees fell by just over 109,000 in May — the steepest monthly fall since May 2020. The annual drop now stands at 274,000. Since Chancellor Rachel Reeves’s inaugural budget in October, payroll employment has contracted by 276,000, prompting concern that rising employer costs — including a £25 billion hike in national insurance contributions this spring — are hitting jobs.

The Office for National Statistics (ONS) also reported that wage growth is slowing. Average pay excluding bonuses rose by 5.2% in the three months to April, down from 5.5% in the previous period and below analysts’ expectations. Including bonuses, wage growth stood at 5.3%, also down from 5.6%.

This cooling came despite the 6.7% increase in the minimum wage in April. KPMG UK’s chief economist Yael Selfin said the figures indicated that wage pressures are likely to ease further this year as the economy slows. “This will limit workers’ bargaining power,” she added.

The UK unemployment rate also edged up to 4.6% in the latest quarter — the highest level since the post-lockdown rebound in 2021. Job vacancies dropped by a further 63,000 to 736,000, as many firms appeared to delay or freeze hiring.

ONS director of economic statistics Liz McKeown said that feedback from businesses indicated a growing hesitancy to replace workers or hire new staff. “There continues to be weakening in the labour market,” she said. “Some firms may be holding back from recruiting.”

Despite this, wage levels remain historically strong, particularly in the public sector, where pay rose by 5.6% compared to 5.1% in the private sector. “Public sector pay is now growing at a higher rate than private sector wages,” McKeown added.

The deteriorating jobs outlook could provide the Bank of England with justification for further interest rate cuts, especially after last week’s soft earnings and inflation data. With inflation now back up to 3.5% in April — its highest since January — the Bank remains under pressure to balance cooling wage growth against stubborn price pressures.

James Smith, economist at ING, said the data “helps cement” rate cut expectations for August and November. Rob Wood of Pantheon Macroeconomics agreed, noting that “the labour market looks in worse shape in May, which could tip the MPC into cutting rates again in August”.

Markets responded swiftly. Sterling dropped 0.6% against the dollar to $1.34, while the yield on 10-year gilts fell to 4.56%. The FTSE 100 rose 0.48% and the FTSE 250 gained 0.40%.

The figures land ahead of Rachel Reeves’s hotly anticipated spending review on Wednesday, where she is expected to outline the government’s day-to-day spending for the next three years, alongside over £100 billion of capital investment.

With calls mounting for increased funding across public services — from defence to welfare — and UK borrowing costs still high, the pressure on the government’s economic strategy is growing.

New GDP figures out this Thursday are expected to show that the UK economy shrank slightly in April, despite a 0.7% expansion in the first quarter. If confirmed, this would reinforce concerns that the post-election honeymoon may be short-lived as Britain’s labour market begins to stall.

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UK payrolls see biggest drop since covid as wage growth slows and job market weakens

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