UK Labor Market Weakens as Employers Cut Jobs Before Tax Increase

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Britain's labor market showed signs of weakening ahead of a tax hike on employers this month, although wage growth remained strong, creating challenges for the Bank of England (BoE), which also anticipates economic fallout from U.S. trade tariffs.

For the first time in nearly four years, job vacancies fell below pre-pandemic levels in the first quarter of 2025, according to the Office for National Statistics (ONS). Provisional figures from employers indicated a drop of 78,000 employees in March, marking the largest decline since the early pandemic days in 2020, though these numbers are often revised. February's data was adjusted to show an 8,000 decrease, rather than the previously reported 21,000 increase.

Deutsche Bank's chief UK economist, Sanjay Raja, noted that the weakening job market would likely outweigh the persistent wage growth, giving the BoE's Monetary Policy Committee (MPC) reason to cut interest rates in May. He added that ongoing trade uncertainties and growing slack in the labor market supported this view.

Investors were pricing in a more than 90% likelihood that the BoE would reduce rates by a quarter-point at its May meeting, following the anticipated economic impact of U.S. tariffs on global growth, including Britain.

KPMG UK's chief economist, Yael Selfin, suggested that rising labor costs, including an increase in social security contributions this month, could slow wage growth. The UK's minimum wage also saw a nearly 7% hike, which might dampen hiring plans.

The BoE is assessing whether inflationary pressures from the labor market are easing enough to continue cutting interest rates. Official data expected on Wednesday is predicted to show a 2.7% consumer price inflation rate for March, slightly down from 2.8% in February but still above the BoE's 2% target. The central bank expects inflation to approach 4% later in the year.

ONS figures revealed that average weekly earnings, excluding bonuses, increased by 5.9% in the three months to February compared to the previous year, slightly higher than the revised 5.8% increase for January. Private-sector pay, which the BoE closely monitors for domestic inflationary trends, also rose by 5.9%, in line with the pace set in January.

Despite these developments, the ONS reported that the UK's unemployment rate, based on an outdated survey, remained at 4.4%.

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