UK jobs market weakens as economy faces tariff hit

Stay informed with free updates

Simply sign up to the UK employment myFT Digest — delivered directly to your inbox.

The UK labour market weakened in February and March ahead of higher taxes on employers from this month, even as wage growth remained strong, underscoring the challenge facing the Bank of England as the economy braces itself for the impact of US tariffs.

Payrolled employment fell by 8,000 between January and February according to tax data published on Tuesday by the Office for National Statistics. The figure was revised from early estimates of a 21,000 gain.

Preliminary figures for March indicated a larger fall of 78,000, or 0.3 per cent of those in payrolled employment, ahead of the introduction this month of higher employers’ national insurance contributions laid out in the October Budget. The national living wage also increased in April.

If confirmed, this would be the biggest fall since May 2020, although the ONS’s preliminary figures were revised by an average of 22,000 jobs each month last year.

Vacancies fell below pre-pandemic levels for the first time since the spring of 2021.

The figures provide “some tentative evidence that businesses started to respond to rises in business taxes and the minimum wage from this month by reducing headcount”, said Ashley Webb of Capital Economics. “Jobs growth could be hit further from the recent increase in uncertainty due to the chaotic way US tariff policy is being set.”

The Bank of England is closely watching the employment data to monitor the impact of the employers’ tax rise and the increase in the national living wage. It is also paying close attention to the economic impact of US tariffs.

The “big picture” from the labour market data is that the Bank of England “has the green light to cut Bank Rate in May”, said Sanjay Raja, economist at Deutsche Bank. “Trade uncertainty remains rife. And slack in the labour market is emerging.”

UK businesses face high uncertainty after US President Donald Trump’s decision on April 2 to impose import tariffs on goods from most countries.

UK exports face a 10 per cent US import tariff, clouding the economic outlook. Financial markets are pricing in a Bank of England rate cut in May, with expectations of two further reductions by the end of the year.

Webb noted that while employment continued to cool, “it hasn’t collapsed as the dire warnings from some business surveys suggested”. Despite softening in the jobs market, “there were few signs of this feeding through to slower wage growth”, he added.

Separate data from the ONS showed annual growth in average weekly earnings, excluding bonuses, was 5.9 per cent in the three months to February, up from 5.8 per cent in the three months to January. Economists had forecast a rise of 6 per cent.

Liz McKeown of the ONS said pay growth had accelerated in the public sector “as previous pay rises fully fed through to our headline figures, while pay in the private sector was little changed”.

Annual average regular earnings growth was 5.9 per cent for the private sector, unchanged from the three months to January, and 5.7 per cent for the public sector, up from 5.2 per cent in the previous period.

Webb said downward pressure on inflation and activity from higher US tariffs “may mean the Bank of England starts to become less worried about the upside risks to inflation from pay growth and more worried about the downside risks to activity”.

Adjusted for inflation, regular wage growth was 2.1 per cent in the three months to February, marking the 21st month of earnings growth outpacing inflation, in a boost to household finances.

The UK unemployment rate was 4.4 per cent in the period, unchanged from the three months to January. However, the figure is less reliable because of problems with the ONS labour force survey that underpins it.

The ONS aims to replace the survey with an improved one by late 2026.