How Budget changes and wage hikes are reshaping the UK labour market - and what it means for interest rates

Wage growth has gathered pace for the first time in more than a year, but signs point to an ongoing cooling off in the jobs market amid mounting uncertainty following October’s UK Budget and as the Bank of England eyes the next move on interest rates.

Official figures show that regular UK earnings growth increased to an annual rate of 5.2 per cent in the three months to October, up from a revised 4.9 per cent in the previous three months and the first time it has risen since August last year. Earnings growth also outstripped inflation by 3 per cent in the three months to October, once the consumer prices index (CPI) rate of inflation is taken into account.

The Office for National Statistics (ONS) estimated that the number of people on UK payrolls fell by 35,000 to 30.4 million between October and November, although this is subject to revision. It added that the number of vacancies fell by 31,000 to 818,000 in the three months to November.

UK wage growth has risen for the first time in more than a year, but signs point to an ongoing cooling off in the jobs market amid mounting uncertainty following recent Budget measures. | Scotsman / PA

Figures showed the UK unemployment rate remained unchanged at 4.3 per cent in the three months to October, although the ONS added a note of caution given changes to the jobs survey. It comes as there are fears over an impact on hiring and jobs after the Budget announced sharp increases in employers' national insurance contributions and a minimum wage rise next year.

Danni Hewson, head of financial analysis at investment platform AJ Bell, said it was “impossible to ignore the cracks that have been widening in the labour market”, with vacancy numbers dropping off month after month.

“A sluggish economy isn’t exactly providing the fuel for job creation and realised fears about potential tax rises in the Budget have made employers cautious,” she noted. “Businesses want to keep skilled staff happy and, knowing a hike in the national living wage is on the cards next April, will have taken forward action when their own pay reviews were implemented.

“For workers, getting a bit more in their pockets will be welcome, but it has pushed the door even further closed on the slim chance that the Bank of England might deliver a surprise cut to interest rates later this week.”

Wage growth has jumped higher for the first time in more than a year, reinforcing expectations that the Bank of England will hold interest rates later this week. | Getty

The figures will be in sharp focus as Bank of England policymakers gather to announce their next move on interest rates on Thursday, with the tick up in wages reinforcing expectations that the base rate will be kept on hold at 4.75 per cent, following two quarter-point cuts over recent months.

ONS director of economic statistics Liz McKeown said: “After slowing steadily for over a year, growth in pay excluding bonuses increased slightly in the latest period, driven by stronger growth in private sector pay.”

On payrolls, she added: “We have seen annual growth rates continue to slow, showing a consistent trend with our latest jobs data from employers. The number of job vacancies has also fallen again, though the total remains a little above where it was before the pandemic.”

According to the latest data, Scotland’s employment rate estimate (aged 16-64) for the three months to October was 73.2 per cent. The unemployment rate stood at an estimated 3.6 per cent, lower than the UK average, and down 0.7% on the previous quarter.

Deputy First Minister Kate Forbes said: “There are encouraging signs of growth in Scotland’s economy with unemployment appearing to fall, payrolled employment at near record levels and higher median monthly pay than the rest of the UK. Our draft Budget for next year was developed in partnership with businesses to accelerate growth.”

PwC UK economist Gora Suri said the rise in earnings growth showed that inflation pressures remain in the economy. He said: “Despite the considerable disinflation we have seen in the UK economy over the last two years, these underlying inflationary pressures remain. This means that the Bank of England is highly likely to keep interest rates on hold at its next meeting on Thursday, before resuming rate cuts in the new year.”

A breakdown of the latest figures show that regular earnings growth in the private sector rose to 5.4 per cent in the three months to October, which is the highest since May. Public sector pay growth stood at 4.3 per cent in the latest period.

Earnings growth had been falling steadily since reaching a peak in August last year, when regular wages rose by 7.9 per cent. But while the recent uptick is good news for workers, it shows the pressure on businesses ahead of further significant increases to their wage bills from next April.

James Cockett, senior labour market economist for the CIPD, the professional body for HR and people development, said: “Employers face tough waters ahead with rising employment costs as a result of the Budget, compounded with a raft of changes in the Employment Rights Bill. The uncertainty around the detail on the Bill means it will be a precarious start to 2025 for many employers.

“The levers they can pull are limited due to ongoing cost pressures,” he added. “We can expect rising prices and job losses, as firms plan for the next financial year. We urge the UK government not to lose sight of smaller businesses in particular, who are likely to be disproportionately affected by the cumulative impact of these changes, and require more support, advice and guidance in implementing many of the proposals.”

Ann Frances Cooney, employment expert and partner at legal firm DWF, said: "As we see the largest raft of employment legislation in decades being implemented, the government's 80 per cent employment rate target seems ambitious as employers take a cautious approach to recruitment."