Unemployment in the UK has surged while wage growth has slowed, as businesses continue to contend with the conflict in the Middle East, higher inflation and political uncertainty.
The unemployment rate hit 5% in the three months to March 2026 – up from 4.9% in February 2026, according to the Office for National Statistics (ONS).
The impact of a weaker job market is more keenly felt among younger people. Youth unemployment climbed to 16.2% in the three months to March 2026. Looking longer-term, the number of payrolled employees under the age of 35 has dropped by 296,000 since October 2024 compared to a rise of 18,000 for older workers.
Including bonuses, wage growth was higher than expected at 4.1% over the first three months of the year. However, when stripping out bonuses, pay growth in the three months to March 2026 was 3.4% – down from 3.6% in February. When taking inflation into account, wages grew by just 0.3%.
Luke Bartholomew, deputy chief economist at Aberdeen, said: “Normally, this slowing in wage growth would be a positive sign that inflation was on a sustainable path back to the 2% target – but inflation is set to surge in the coming months due to rising energy prices and other spillovers from the Iran conflict.”
Weaker wage growth and higher inflation – with the latest inflation data for April 2026 expected on 20 May 2026 – means inflation-adjusted wages will start to fall, Bartholomew said, which will ultimately weigh on household spending and growth and “create a dilemma” for the Bank of England at its next meeting on 18 June.
Absent a further surge in oil prices, he noted it is hard to see interest rates being increased much, if at all, in this environment.
On wage growth, Neil Birrell, chief investment officer at Premier Miton, said the UK jobs market has demonstrated its resilience in the first quarter in the face of new legislation coming into play, a struggling economy, higher inflation and political uncertainty.
“However, with the Iran war ongoing and even more domestic political stress over the next few months, it is hard to see that strength continuing,” he said.
Despite these signs of strain in the labour market, the broader economic outlook has improved slightly.
Earlier this week, the International Monetary Fund’s (IMF) decision to upgrade its UK growth forecast to 1% for 2026, up from 0.8%. This follows its previous forecast that the UK would be hardest hit by the conflict in the Middle East among the world’s most advanced economies.
The IMF said the UK has maintained more momentum and resilience than expected, with the economy growing by 0.6% in the first quarter of 2026, despite ongoing “domestic uncertainty” and the economic ripples felt from the ongoing war in Iran.