UK Unemployment to Hit 9-Year High on Rising Labor Costs

The UK unemployment rate is on track to hit its highest level since 2015 this year, driven by a sharp increase in labor costs, according to a new forecast from the National Institute of Economic and Social Research (NIESR).

The think tank predicts the jobless rate will average 5.4% in the current year, a notable increase from 4.8% in 2025 and higher than most other economic projections.

Rising Minimum Wage and Taxes Fuel Jobless Rate Spike

A key factor behind the forecast is the mounting cost of hiring workers. "Part of this unemployment story in the UK is rising labour costs," explained NIESR economist Ben Caswell.

According to the institute's analysis, the cost of employing an entry-level worker surged by 10.6% last year. This was fueled by two main drivers:

• A rising minimum wage: Recent government policy has pushed the minimum wage to two-thirds of median earnings.

• Higher employer taxes: An increase in social security contributions last year added to the financial burden on companies.

NIESR found a direct correlation between these costs and job figures. "Industries which have a larger share of their workforce on the minimum wage have also experienced larger increases in their respective unemployment rates," Caswell noted.

The pressure on employers is set to continue, with Britain's minimum wage scheduled to rise by another 4% in April. Prime Minister Keir Starmer's government also plans to continue phasing out the lower minimum wage rates for 18-20 year-old workers, further standardizing labor costs.

Tech Sector Headwinds and Shifting Labor Force Dynamics

NIESR's analysis also identified emerging weakness in the IT sector, where a rise in unemployment may be linked to the adoption of artificial intelligence reducing the demand for certain entry-level positions.

However, the think tank clarified that the rising unemployment rate isn't solely due to a lack of job vacancies. The labor pool itself is expanding. More people who were previously considered economically inactive—neither working nor looking for a job—are now seeking employment. This trend, which follows a post-pandemic rise in inactivity rates, is increasing the number of people officially counted as unemployed.

Long-Term Outlook and Bank of England Rate Cut Predictions

Looking ahead, NIESR projects the unemployment rate will likely fall to 5% by 2028 or 2029, which it considers a sustainable long-term level outside of an economic boom. This comes after the official unemployment rate hit a nearly 50-year low of 3.8% in 2022 and 2019, though the survey used for that data is currently being overhauled due to quality concerns.

Alongside its unemployment forecast, NIESR also revised its economic growth projections for 2026 and 2027 upward to 1.4% and 1.3%, respectively. The institute anticipates two interest rate cuts from the Bank of England this year, which would lower the benchmark rate from 3.75% to 3.25%.

This prediction is more aggressive than the market consensus. Economists surveyed by Reuters do not expect the first rate cut to occur before March at the earliest. The Bank of England is scheduled to release its own updated economic forecasts on Thursday.