On the surface, January’s jobs report wasn’t good — and that is exactly how it will be portrayed by the media: The unemployment rate rose to its highest level in years, vacancies are flat, and job growth has been negative for five months in a row.
Underneath the surface, though, revisions to the payroll employment data show that the job market is in a slightly better place than we thought. And worker churn, a very cyclical indicator, is also picking up.
There is a good chance that the U.K. labor market has finally reached the bottom and will pick up from here, albeit gradually.
Unemployment keeps rising while vacancies stagnate
The unemployment rate increased to 5.2% at the end of last year. That is the highest level since 2015 (excluding a few months during the peak of the pandemic in late 2020). The Bank of England (BoE) now expects that unemployment will increase further this year — peaking at around 5.3% — and will only gradually decline to under 5% throughout 2027 and 2028.
Meanwhile, the number of vacancies has remained relatively flat since last summer. Following the double whammy of the National Insurance contribution increase together with several large minimum wage hikes since 2020, companies remain extremely reluctant to increase headcount. Very weak hiring demand and a rise in redundancies over the last year explain the slow but gradual increase in unemployment as well as declining jobs numbers.
Job growth is negative — or is it?
Preliminary data shows that payroll employment fell by about 10,500 in January, the fifth month of negative job growth. What you should keep in mind, though, is that data revisions to the jobs numbers are quite large.
Before this most recent data was released, we thought that cumulative job losses since August 2024 amounted to about 220,000. However, this month’s jobs report included a large revision of the data for most of last year. In fact, the new numbers suggest that the UK has only shed some 170,000 jobs since mid-2024. While obviously still bad, the updated figures have reduced job losses by about 50,000.
Moreover, revisions lowered job losses by an average of 10,000 each month between July and December 2025. There is good chance that, when all is said and done, this year’s January report might even show minor job gains once we get the final data.
The number of workers changing jobs has also seen a modest improvement: +30,000 in Q4 2025 compared to Q4 2024.
Worker churn is highly cyclical as the likelihood of job switching depends on the health of the labor market. The fact that job-to-job transitions are slightly up and the size of the positive revisions suggest that the U.K. labor market has reached a bottom.
Recent economic surveys suggest an improvement in economic momentum following last year’s Labour Budget. I therefore expect that employment growth will turn positive again soon — if it hasn’t already — as employers have already dealt with the repercussions from Labour’s domestic policies.
Wage growth is driven by public sector pay
Elevated wage growth and high inflation are the main reason why the BoE hasn’t eased monetary policy more. But on that front, we are now seeing some good news as well. Inflation is expected to fall from 3.3% right now towards the BoE’s inflation target of 2% later this year. While public sector wage growth remains high at 6.5%, private sector pay growth has slowed sharply from more than 5% a year ago to 3.5% now.
Weaker wage pressures will give monetary policy makers confidence that the U.K.’s wage-price spiral is finally over.
Financial markets expect that the BoE will cut interest rates twice from the current level of 3.75% to 3.25% by end of year. This will help shore up the jobs and housing market as well as business investment and economic confidence in general.
What does that mean for recruiters?
This jobs report is tainted by the bleak unemployment of 5.2% and another month of payroll job losses. However, that narrative omits important factors. Revisions to the payroll data show that job losses over the last 18 months are quite a bit lower than we previously thought. Moreover, January’s data will be revised again, potentially into positive territory.
Vacancy data has been stable for a year and worker churn, a highly cyclical indicator, seems to suggest that the labor market has stabilized and is potentially picking up, albeit slowly.
With more rate cuts on the horizon, recruiters should expect a gradual improvement in hiring conditions this year. Despite AI and international headwinds, companies will start to increase headcount again as growth turns from sluggish to mediocre.
