Signs of a Turnaround in UK Labour Market: Pay Growth at 3.7%, Unemployment Down, but Economists Urge Caution

Pay growth for workers in the United Kingdom has edged up slightly and the jobs market is showing signs of a slow recovery. According to the country's official statistics, this mixed picture has strengthened the likelihood that the Bank of England will raise its policy interest rate next month.

Coming after a run of stronger-than-expected economic growth, the data suggests the long downturn in hiring may have bottomed out and begun to stabilise. Reuters reported that the figures also bring some relief for the government ahead of Chancellor John Healey's first national budget next week.

According to the Office for National Statistics (ONS), average weekly earnings excluding bonuses rose 3.7% in the three months to August compared with the same period a year earlier. After falling to 3.4% earlier this year, the rate has maintained a gradual recovery, beating the 3.6% forecast in a Reuters poll of economists.

Private-sector pay growth also rose, from 2.9% to 3.0% — its first increase since the final quarter of 2024.

Preliminary figures from the UK's tax authority show the number of payrolled employees rose by 13,000 in September. August's preliminary estimate of a 26,000 fall was also revised to a rise of 1,000.

The ONS survey put the unemployment rate at 4.7% in the three months to August — its lowest since mid-2025.

Yet some employment indicators still point clearly to weakness. Vacancies fell from 704,000 to 691,000 in the three months to September — the first time the number of job openings has dropped below 700,000 since April 2021, and, excluding the pandemic period, the lowest since 2014.

Jack Kennedy, senior economist at the jobs platform Indeed, said: “The latest statistics signal some resilience in the labour market, reflecting the broader economy's better-than-expected performance.” But he noted that a full turnaround depends on the coming budget: “Today's statistics confirm the labour market is hanging on. The question is whether the budget can give employers a reason to turn the corner.”

Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, struck a cautionary note: “The continued fall in vacancies is a warning sign for the labour market, suggesting a harmful side effect of this year's AI-driven economic growth is weak hiring demand, compounded by additional employment costs.” Hiring in the UK has slowed since 2025, when then-Chancellor Rachel Reeves raised taxes on employers.

The pound rose against the US dollar after the labour market data was released. The Bank of England is closely watching whether the oil price shock from the Middle East war is feeding into overall inflation through higher wage demands. Investors believe the central bank could raise its key rate to 4% at November's Monetary Policy Committee meeting.

Bank of England Governor Andrew Bailey recently warned that the longer the war drags on, the more necessary policy action will become for the central bank. Economists polled by Reuters forecast that consumer price inflation in September could rise to 3.4%, from 3.1% the previous month.

Overall, the UK labour market stands at a delicate juncture — pay and employment show signs of recovery, but the steady fall in vacancies and uncertainty around the coming budget are weighing on employers' decisions. Next week's budget and the central bank's November meeting will determine whether this turnaround endures.