The unexpected drop in Britain’s unemployment rate to 4.9 per cent has been seized upon by Number 11 as evidence that the economy entered the spring on a firm footing. Business owners reading the small print of Tuesday’s labour market figures, however, will find precious little to celebrate.
Headline jobless figures from the Office for National Statistics showed the rate falling from 5.2 per cent in the previous quarter to 4.9 per cent in the three months to February, comfortably ahead of City forecasts. Yet the improvement owes rather more to a statistical sleight of hand than to any underlying strength in hiring, with vacancies sliding to a near five-year low of 711,000 and payrolled employment shedding 11,000 workers in March alone.
For Britain’s small and medium-sized enterprises, the data lays bare the cumulative toll of last autumn’s £25 billion increase in employer national insurance contributions. Since chancellor Rachel Reeves unveiled the rise in October 2024, payrolled employment has contracted by 143,000, a figure that masks the disproportionate burden borne by smaller firms with thinner margins to absorb wage costs and a slimmer cushion against rising payroll taxes.
Wage growth has now slowed to its weakest pace since the depths of the pandemic. Regular pay rose by 3.6 per cent in the three months to February, down from 3.8 per cent, while private sector pay growth of 3.2 per cent, the lowest reading since October 2020, sits in stark contrast to the 5.2 per cent enjoyed by public sector workers. For owner-managers across hospitality, retail and professional services, the squeeze on private pay is the clearest signal yet that hiring confidence has drained from the system.
The figures predate the outbreak of the US-Israeli war with Iran in late February, leaving the headline numbers looking distinctly stale. Ashley Webb, senior UK economist at Capital Economics, said the latest payroll and vacancy data offered “the first signs that the rise in energy prices due to the Iran war is weighing on businesses’ hiring plans and that is feeding through into a further softening in pay growth”.
The International Monetary Fund has warned that the United Kingdom will be the hardest hit of any G7 economy by the conflict, owing to its outsized exposure to international gas prices. Inflation figures due on Wednesday are expected to show the headline rate climbing to 3.3 per cent in March, up from 3 per cent in February, a development that will make the cost-of-doing-business equation still more uncomfortable for the country’s 5.5 million SMEs.
A closer reading of the ONS release reveals less flattering currents. Economic inactivity, those of working age who are neither in work nor actively seeking it, rose to 21 per cent from 20.7 per cent, with an additional 116,000 people dropping out of the labour market altogether. Liz McKeown, the ONS director of economic statistics, attributed the shift largely to “fewer students seeking work alongside their studies”.
Strip out that statistical quirk and the picture darkens considerably. The number of unemployed working-age people fell by 88,000, but employment among those aged 16 to 64 actually slipped by 5,000. A 17,000 net rise in employment among those aged 16 and over suggests that it was older workers, rather than those of conventional working age, who picked up what jobs were going. In short, the labour market is shrinking at the edges while the headline rate flatters its health.
For SME owners weighing recruitment plans against rising input costs, the silver lining lies in Threadneedle Street. With the Bank of England’s monetary policy committee due to meet next Thursday, the slackening labour market may tilt the balance towards holding the base rate at 3.75 per cent, or even cutting it later this year, rather than tightening to combat the Iran-driven energy spike. Cheaper credit cannot offset a tax rise or a vanished customer, but for businesses servicing variable-rate debt it would at least provide some relief.
Whether that proves cold comfort depends largely on how long the Gulf disruption persists. For now, the headline jobs number flatters a labour market that, on closer inspection, is creaking, and the small business community knows it.
Read more:
Unemployment dip flatters to deceive as SME hiring freezes amid Iran shock