UK pay growth rises 6% despite job loss warnings after Reeves’s budget

UK workers’ pay grew sharply in the final quarter of last year and unemployment remained unchanged despite warnings from business that Rachel Reeves’s autumn budget would lead to job losses.

Figures from the Office for National Statistics (ONS) show annual growth in total average weekly earnings rose by 6% in the three months to the end of December, up from November’s equivalent reading of 5.6% and above a 5.9% forecast made by City economists.

Regular pay, excluding bonuses, accelerated from 5.6% to 5.9%, matching estimates and highlighting the challenge for the Bank of England as it considers cutting interest rates. The pound rose against the dollar after the data.

Unemployment remained unchanged at 4.4%, confounding expectations of a marginal increase to 4.5%, while the number of employees on company payrolls was broadly unchanged in the final quarter of the year.

The number of job vacancies rose from 818,000 in December to 819,000 in January. Although they have fallen steadily since 2022, vacancies remain above pre-pandemic levels.

The figures suggest Britain’s jobs market is healthier than expected after business surveys had suggested employers were responding to Reeves’s October budget by cutting jobs at the fastest pace since the financial crisis in 2009, excluding during the coronavirus crisis.

The UK economy has also performed more strongly than forecast, as figures out last week showed it narrowly avoided recession in the final months of 2024.

However, economists said there were signs the jobs market was still cooling, albeit less dramatically than feared. The number of workers on company payrolls fell slightly in December, by 14,000, but has been broadly flat since May 2024

Rob Wood, chief UK economist at the consultancy Pantheon Macroeconomics, said: “Employment has stalled rather than collapsed. That is far from a rosy situation as payroll tax hikes, surging global uncertainty and a half year of weak economic growth take a toll on employment. But employment is holding up better than some dire business surveys.”

Company bosses have warned that the chancellor’s planned £25bn increase in employers’ national insurance contributions and 6.7% rise in the minimum wage – both coming in from April – could force them to cut jobs. Employer surveys suggest companies are preparing for the biggest round of redundancies in a decade amid collapsing business confidence.

While the labour data released on Tuesday shows little sign of this in the final quarter of last year, the ONS has cautioned there are issues with the quality of the UK’s official jobs market statistics. Experts have argued this leaves policymakers “flying blind” with the prospect that decisions are being taken based on flawed data.

Earlier this month, the Bank of England halved its growth forecasts for the UK economy and said households would come under renewed pressure from rising inflation. It cut interest rates from 4.75% to 4.5%.

Resilience in the jobs market and wage growth remaining at higher levels will come as a headache for the central bank, amid concerns that robust growth in earnings could stoke inflation. Annual growth in real-terms pay, after taking into account inflation, was 3.4%, the highest level since 2021.

Sarah Coles, the head of personal finance at Hargreaves Lansdown, said: “Wages have outpaced inflation again, easing the pressure on budgets and making life a little more comfortable. However, we can’t afford to relax just yet because wage hikes raise the spectre of inflation, which could be lurking around the corner.”

Figures due on Wednesday are expected to show inflation accelerated from 2.5% in December to 2.8% in January amid a rise in energy prices. The Bank forecasts inflation will reach a fresh peak of 3.7% by the autumn – almost twice its 2% target.

Liz Kendall, the work and pensions secretary, said: “Since July wages have continued to grow at pace, putting vital money back in people’s pockets as we work to make work pay and improve living standards for all. But these figures also show that too many people are being locked out of work and denied that chance, including those sick and disabled. Instead of writing people off and labelling them, we must step up our support.”