Britain’s private employers have all but stopped bidding for staff. Pay growth outside the public sector slowed to 2.9 per cent, the first time it has dropped below 3 per cent since the pandemic in 2020, while payrolls shrank by 4,000 and vacancies fell for another month.
The Office for National Statistics said the small contraction in June defied City projections of a rise of 20,000 jobs. The unemployment rate was unchanged at 4.9 per cent in the three months to May, having been expected to rise to 5 per cent.
For business owners, the significant number is not the headline unemployment rate but the 712,000 vacancies still open across the economy, down another 7,000 on the quarter. The ONS attributed that decline to smaller firms choosing not to hire in order to manage their wage bills and costs.
That is a familiar calculation in any SME finance meeting. When employment costs are fixed and demand is uncertain, the vacancy is the first thing to go. The result is a labour market that looks stable in aggregate while the hiring freeze among smaller employers deepens beneath the surface.
Total average earnings growth, including bonuses, slowed to 4.3 per cent from 4.4 per cent in the previous three-month period, and was unchanged at 3.9 per cent excluding bonuses. The gap between sectors is now stark: public sector pay ran at 5.5 per cent, flattered by the timing of NHS pay awards, against 2.9 per cent in the private sector.
Peter Dixon, senior economist at the National Institute for Economic and Social Research, said slowing pay growth would “complicate Andy Burnham’s pledge to give people breathing space to help with the cost of living, particularly with inflation poised to rise further in the second half of the year”.
There is a paradox in the numbers for anyone recruiting. Employment in the three months to May actually jumped by 64,000 to just below 34.5 million, and the economic inactivity rate edged down to 20.9 per cent from 21 per cent. More people are looking for work at precisely the moment employers are cutting hiring plans. Firms that can afford to recruit will find the candidate market friendlier than it has been in years.
Pay across the economy still rose faster than inflation for the 36th month in a row. Data due on Wednesday is expected to show inflation edged to 2.7 per cent in the year to June, which would be the lowest level since March 2025. The economy also returned to growth in May, with GDP up 0.1 per cent in the month.
A caveat is warranted. The ONS, whose labour market data has been plagued by inaccuracy problems for the past two years, said it carried out fewer interviews in the latest period “because of an operational issue, but our analysis suggests the impact on our headline estimates is minimal”. Payroll and employment estimates draw on different data sets, and the former is frequently revised.
Liz McKeown, ONS director of economic statistics, said: “The latest data show a relatively steady labour market picture overall, though some measures continue to suggest softening.” She added: “The number of employees on payroll was broadly flat in the latest month, while survey estimates suggest employment, unemployment and inactivity rates were little changed in the latest quarter.”
The read-across to borrowing costs matters more than the jobs numbers themselves for most owner-managers. Economists believe the health of the labour market will partly determine whether the Bank of England raises interest rates this year to counteract price pressures caused by the Middle East war energy shock.
The monetary policy committee meets on 30 July and is expected to leave borrowing costs unchanged at 3.75 per cent. UK government bond yields have risen sharply over the past month in response to an escalation in fighting between the US and Iran, which is why rate cuts remain off the table for now.
Cooling wage growth is the one variable pushing the other way. Firms holding off on recruitment to protect margins are, collectively, doing the Bank’s work for it.
