Pay increases in the UK have slowed markedly, with average earnings growth dropping to 3.8% in the three months to January — the weakest pace since 2020. This slowdown comes despite inflation falling to 3% in the same period and points to mounting pressures in the labour market, particularly for younger workers.
A Sharp Slowdown in Pay Growth
The Office for National Statistics (ONS) revealed that wage growth in the UK has hit a five-year low, tumbling from 4.2% to 3.8% during the final quarter of 2025 and the start of 2026. This decline outpaced economists’ predictions, signalling a notable cooling in the once robust pay rises seen post-pandemic.
Public sector wages remain higher on average, growing at 5.9%, while private sector pay increases have slowed more sharply to 3.3%. The drop in public sector wage growth partly reflects the fading impact of delayed pay rises and bonuses awarded during the peak inflation period last year.
Liz McKeown, director of economic statistics at the ONS, noted that although the number of job vacancies has seen a slight uptick, overall hiring remains subdued. Reductions in employment have been particularly pronounced in retail and hospitality, sectors that have been struggling with rising costs and ongoing economic uncertainty.
Young Workers Hit Hardest
The most striking feature of the labour market is the diverging fortunes between age groups. Martin Beck, chief economist at WPI Strategy, described the divide as "stark." While employment among those aged 35 and over has increased by 110,000 since mid-2024, there has been a drop of nearly 220,000 jobs for workers 34 and under.
Unemployment among 18 to 24 year-olds has reached its highest level since 2015, with close to 600,000 in this age bracket currently out of work and actively seeking employment. The Chartered Institute of Personnel and Development called this trend "a huge waste of potential," warning of the long-term damage caused by the sharp cutback on entry-level hiring.
Such a shift could have profound effects on the future workforce, limiting the opportunities for younger people to gain experience and advance their careers in a changing economy.
Economic and Policy Implications
The slowdown in wage growth poses a dilemma for the Bank of England. Policymakers face conflicting pressures: slower pay growth helps ease inflation, which fell to 3% in January, yet geopolitical tensions in the Middle East and rising oil prices risk pushing prices up again.
Peter Dixon, senior economist at the National Institute of Economic and Social Research, described the situation as a "headache" for the central bank, which will probably hold interest rates steady at 3.75% following recent concerns about inflationary pressures stemming from the conflict in the Middle East.
The Bank will also be wary of potential wage demands from workers aiming to keep pace with increased living costs, particularly as petrol prices rise. However, the overall fragility of economic activity and the impact of technological changes such as AI may limit how far wages can climb.
Business and Employment Challenges
Meanwhile, the private sector continues to feel the strain. The hospitality and retail industries have been vocal about the challenges they face. UK Hospitality’s chief executive, Allen Simpson, criticised the government's tax policies, especially looming business rate hikes, which threaten to accelerate job losses and business closures.
The latest data showed a monthly fall of 43,000 employees in December 2025 — the biggest drop since late 2020 — with shops, restaurants, bars and hotels among the hardest hit. The chancellor, Rachel Reeves, has been under pressure to provide support, with reports suggesting plans to reduce business rates for pubs to prevent a sharp rise over the next three years.
Despite more people entering the workforce, sickness-related inactivity remains high, adding another layer of complexity to the labour market situation.
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As the UK grapples with uneven pay growth and falling employment in key sectors, the outlook for workers—especially younger ones—remains uncertain. How policymakers and businesses respond to these pressures will shape the country's economic resilience in the months ahead.
This article was created with AI assistance.
