There is no doubt that the U.K. economy and labor market are not in a good spot. However, this week’s economic data warrants cautious optimism. Despite the recent energy price shock, inflation in May came in at 2.9%, lower than economists expected. With private-sector wage growth normalizing, the Bank of England (BoE) was able to keep interest rates steady this week. Meanwhile, yesterday’s job numbers were also better than expected. The payroll employment losses in April were revised down, while May’s number was even slightly positive. And even as payroll employment has contracted over the year, rising self-employment is cushioning the blow from the weakening labor market.
Unemployment steady, payroll job losses revised down
The unemployment rate in the U.K. now stands at 4.9%, which is even a tad lower than at the end of 2025. Keep in mind though that this figure is based on the somewhat unreliable household survey. Nevertheless, the fact that unemployment has remained steady since the fall of 2025 is good news. It shows that the labor market has not weakened as much as we previously feared at the beginning of this year.
There was also some good news on the payroll employment front. As expected, April’s job losses were effectively halved by subsequent data revisions — the preliminary number showing a decline of 100,000 was changed to a “mere” 52,000 jobs lost. Meanwhile, the U.K. added about 1,700 payroll jobs in May. While this is rather insignificant, at least it’s positive.
Sectoral employment trends continue unabated. Retail and hospitality are the two industries that have suffered the most in recent years, recording job losses of 125,000 and 102,000, respectively, since January 2024. Both sectors have suffered from Labour’s policies — the National Insurance contribution increase and minimum wage hikes — while also being exposed to the price shock in recent months. Healthcare continues to be the only sector showing significant employment gains, up by almost 150,000 over the same period. Transportation seems to be in reasonable shape with employment remaining steady for now, defying our more pessimistic assessment. This is somewhat surprising since the sector is highly reliant on energy.
The total number of vacancies in the U.K. remains extremely low across all sectors, standing at just over 700,000 — the last time vacancies were so depressed outside of the pandemic was in 2014. Because labor demand is so sluggish, workers are finding it extremely difficult to change roles. Job-to-job transitions have declined substantially and are much lower in the first quarter compared with the same period last year.
Is self-employment acting as a stabilizer for economic activity?
During the pandemic, self-employment in the U.K. plummeted from about 5 million in early 2020 to a mere 4.2 million in 2021. One piece of good news is that self-employment has shown signs of recovery since 2025 with recent numbers showing an increase to about 4.6 million. While we probably need more data points to ascertain whether this trend will continue, it is starting to look like self-employment is acting as a cushion for the weak labor market. With payroll employment down on the year, workers are taking on gig and freelance jobs to supplement or even replace the income they might have lost because of layoffs. This shift in the labor market can therefore act as a stabilizer for the economy, smoothing household consumption, as more workers are choosing self-employment over becoming unemployed. It is plausible that recent advances in AI are supporting this trend by reducing the barriers to self-employment: AI tools can help with bookkeeping, invoicing, contract automation, marketing, building a professional website, and much more. The possibilities are almost endless, lowering the cost of going solo.
Wage growth and inflation are heading in the right direction
One of the biggest data surprises this week was the slight decline in the U.K. inflation rate to 2.9%. Despite the oil shock, underlying inflation in the economy has not increased in recent months. The highly regulated domestic energy market is one reason for this. But price pressures across all sectors have remained remarkably subdued for now. Meanwhile, private-sector wage growth is rising at a rate of about 4%, a decline from last year, allowing monetary policymakers to keep interest rates steady
Following yesterday’s monetary policy decision, financial markets are only expecting one interest rate hike this year, with a small chance of a second one. Even as there are some inflationary pressures in the pipeline due to the energy price shock, the BoE is currently playing for time with the intent of not further weakening the economy and labor market any further. Although growth was strong at the beginning of the year, underlying momentum points toward stagnation right now.
What does this mean for recruiters?
Some of the recent economic data in the U.K. has positively surprised. Inflation remains lower than expected, while wage growth continues to normalize. This has allowed the BoE to keep interest rates steady, which is good news as additional rate hikes would further dampen economic activity. April’s payroll employment losses have been revised down substantially, while the May numbers show a marginal increase. But the economy is not out of the woods yet. Keep in mind that a lot of data like the unemployment rate is backward-looking. Even with the Iran conflict ending, the economic effect of the oil price shock is not fully behind us yet. The inflationary legacy, including stagnant real wages, will drag on until the end of the year.
For recruiters, this means that employers continue to be quite cautious about adding headcount, especially since global economic uncertainty remains highly elevated. The vacancy data shows that labor demand in the U.K. is extremely weak. Even though this means that recruiters can draw from a larger pool of applicants, the combination of AI and a weak labor market is creating an application tsunami for many job postings. Even as the labor market has moved on from the candidate shortage that companies experienced post-pandemic, hiring has not exactly gotten easier. Recruiters simply face different challenges than before.
