UK Unemployment Rate Rises Unexpectedly

The UK labour market, once a post-pandemic bright spot, has turned decisively. The unemployment rate hit 5.0% in the three months to March 2026 — above market expectations and well above the 3.7% trough reached in late 2022 [1]. With 1.81 million people now out of work and the sharpest annual rise among G7 economies, the question is no longer whether something has gone wrong but how deep the damage runs and who bears the cost [2].

The Numbers: From Record Low to Five-Year High

The headline figures tell a clear story of deterioration. After touching a record low of 3.7% in late 2022, unemployment drifted up modestly through 2023 and 2024, reaching 4.4% by the end of 2024 [1]. Then the acceleration began. By August 2025, the rate had reached 4.8% — a level economists had not anticipated [3]. By the final quarter of 2025, it had climbed to 5.2%, the highest since May 2021 when pandemic restrictions were still in force [4]. The slight retreat to 5.0% in early 2026 offered marginal comfort [1].

Source: ONS / Trading Economics

Data as of May 13, 2026CSV

In absolute terms, approximately 1.81 million people aged 16 and over were unemployed in the December 2025 to February 2026 period [2]. Year-on-year, unemployment increased by 192,000, with all durations of unemployment rising [5]. Compared to the pre-pandemic baseline of late 2019, when unemployment stood at 3.8% and around 1.29 million people were out of work, the current figure represents roughly 500,000 additional unemployed people [6].

Where the Pain Is Concentrated

The increase has not been distributed evenly across the country or the workforce.

Regional disparities are stark. London recorded the highest unemployment rate at 7.4% in the December 2025 to February 2026 period, while Northern Ireland had the lowest at 2.2% [7]. The South East maintained a relatively high employment rate at 78.6%, contrasting with weaker labour markets in urban centres [7].

Young workers have been hit hardest. The unemployment rate for 16-to-24-year-olds reached 15.8%, up from 14.6% a year earlier — representing 713,000 young people out of work, an increase of 70,000 [2]. This demographic has borne a disproportionate share of the adjustment, consistent with patterns where employers freeze entry-level hiring before cutting established positions.

Ethnic minorities face significantly higher rates. The unemployment rate for people of white ethnicity was 4.3%, while the rate for people in the Bangladeshi ethnic group was 13.4% [8]. These gaps, which predate the current downturn, have widened as the labour market has softened.

The sectoral picture is broad-based rather than concentrated in a single industry. Vacancies fell across 13 of 18 industry sectors, with small businesses employing 1 to 9 people recording the steepest drops [9]. Total vacancies fell to 711,000 in early 2026 — down 29,000 on the quarter and 54% below the mid-2022 peak of roughly 1.3 million [9].

Source: ONS

Data as of Apr 15, 2026CSV

The National Insurance Question

A central debate in the UK's employment downturn is the role of the April 2025 increase in employer National Insurance contributions (NICs). The government raised the employer rate from 13.8% to 15% and lowered the threshold from £9,100 to £5,000 per employee, substantially increasing the cost of employment [10].

The CIPD's survey of over 2,000 employers, conducted in January 2025 — before the changes took effect — found that nine in ten organisations expected their employment costs to increase, with 43% saying the impact would be "to a large extent" [11]. One in four employers (25%) planned to make redundancies in the three months to March 2025, the highest level in a decade outside of the pandemic, up from 21% in the previous quarter [11]. The increase was sharpest in the private sector, where redundancy intentions rose from 22% to 27% [11].

Among businesses expecting higher costs, nearly a third (32%) planned to reduce headcount through redundancies or reduced hiring, while over a third (37%) said they would try to improve efficiency instead [11]. A separate finding showed that 46% of firms said the tax increase would affect recruitment decisions, with many reporting they had already paused or postponed hiring [12].

The real-world consequences have been measurable. Between October 2024 and April 2025, employee jobs fell by 167,000 in HMRC's Real Time Information data [12]. Major employers including Marks & Spencer, Boots, John Lewis, and H&M announced store closures or downsizing plans [12]. Meanwhile, 42% of employers said they planned to raise prices to offset costs, rising to 68% among retailers [12].

However, attributing the entire rise to NICs would be an oversimplification. Global economic uncertainty, weakening consumer demand, and the parallel minimum wage increase all played contributing roles [12]. The NICs hike landed in an economy already losing momentum, amplifying existing pressures rather than creating them from scratch.

How the UK Compares Internationally

The UK's unemployment trajectory stands out among peer economies. In Q3 2025, the UK's harmonised rate of 5.0% sat above Germany's 3.8% and the US rate of 4.3%, though below France's 7.7% [13].

Source: House of Commons Library / OECD

Data as of Dec 1, 2025CSV

More telling is the rate of change. The UK's unemployment rate rose by 0.8 percentage points over the year to Q4 2025 — the steepest increase of any G7 country over that period [13]. France's rate rose by 0.6 percentage points and Germany's by 0.5 points [13]. The US labour market, by comparison, remained relatively stable.

This suggests the UK's deterioration is not simply a reflection of a global downturn but has a significant domestic component. The combination of fiscal tightening through employer taxation and a labour market already weakened by post-Brexit adjustment appears to have made the UK an outlier in the G7.

Source: World Bank Open Data

Data as of Dec 31, 2025CSV

The Case That This Is Noise — and Why It's Getting Harder to Make

Some analysts have argued that the unemployment rise reflects healthy adjustment rather than genuine distress. There are elements of this case worth taking seriously.

First, the slight fall from 5.2% to 5.0% in Q1 2026, accompanied by a drop of 77,000 in the number of unemployed people, suggests the peak may have already passed [1]. Second, wages have continued to grow in real terms — average pay rose 3.8% in cash terms including bonuses, translating to a real increase of 0.7% [9]. Workers who remain employed are seeing their purchasing power improve, which is not typical of a recessionary labour market.

Third, the employment rate for 16-to-64-year-olds was 75.0%, down only slightly from 75.1% a year earlier [9]. The economic inactivity rate was 21.0%, with 9.12 million working-age people outside the labour force [9]. Some of the unemployment increase may reflect people re-entering the labour force — moving from inactivity to active job search — rather than people losing jobs. This would represent improved participation, which is typically a positive signal.

However, this argument grows weaker with each quarter. Vacancies have been falling continuously for over three years, now sitting well below pre-pandemic levels [9]. The employment rate remains 1.1 percentage points below its pre-pandemic level [6]. And wage growth has been decelerating — total pay growth in cash terms dropped below 4% for the first time since 2020 [9]. The underlying indicators are pointing in the same direction as the headline rate.

Long-Term Unemployment and the Scarring Risk

The composition of unemployment matters as much as the level. The ONS reported that the number of people unemployed for between 6 and 12 months, and for over 12 months, both increased in the quarter to February 2026 [5]. All durations of unemployment rose year-on-year [5].

This is a warning sign. Short spells of unemployment — workers cycling between jobs — are a normal feature of dynamic labour markets. But when people begin accumulating months out of work, skills atrophy, networks weaken, and the probability of returning to employment drops significantly. Economists refer to this as "hysteresis" or structural scarring, where temporary unemployment becomes self-reinforcing.

The UK has particular vulnerability here. The combination of high economic inactivity — 9.12 million working-age people are not in the labour force at all [9] — and rising long-term unemployment suggests a growing pool of people becoming detached from the world of work. With job vacancies falling to their lowest since early 2021 [9], the opportunities for re-entry are narrowing at the same time the pool of jobseekers is expanding.

The Fiscal Reckoning

Rising unemployment feeds directly into public spending. As of September 2025, 8.1 million adults in Great Britain lived in a family receiving Universal Credit — roughly a fifth of the working-age population — with 5.5 million of those not in employment [14]. By August 2025, 6.3 million families were receiving at least some UC, representing 22% of all working-age families [14].

The Office for Budget Responsibility's March 2026 forecast raised its unemployment projections, anticipating the rate would peak at 5.3% before gradually returning to an assumed equilibrium of just over 4% [15]. The OBR revised GDP growth down to 1.1% for 2026, 0.3 percentage points below its November forecast, citing "weaker-than-expected GDP outturns in late 2025, further evidence of a loosening labour market and subdued business surveys" [15].

Total welfare spending for 2026 was budgeted at £188 billion [15]. The government's welfare reform package — including reversals of winter fuel payment cuts and the removal of the two-child limit in Universal Credit — carries a combined cost of £9 billion by 2029-30 [15]. Universal Credit standard allowances are set to increase from £400.14 to £424.90 per month for single claimants aged 25 and over from April 2026 [14].

If unemployment continues rising at the pace seen in 2025 — roughly 0.8 percentage points per year — for two additional quarters, the fiscal consequences would be significant. Each percentage point of unemployment broadly corresponds to several hundred thousand additional claimants. With UC costs already running at over £80 billion annually and the government's fiscal headroom measured in single-digit billions, even a modest overshoot of the OBR's forecasts would threaten the Chancellor's fiscal rules [15].

What Comes Next

The UK labour market sits at an inflection point. The OBR's central forecast assumes unemployment peaks and retreats — a soft landing. But that assumption rests on GDP growth recovering, employer confidence stabilising after the NICs shock, and global trade conditions not deteriorating further.

Each of those assumptions is contestable. Business surveys remain subdued [15]. The vacancy decline shows no signs of bottoming out [9]. And the government's own policy choices — higher employer taxes, minimum wage increases — have front-loaded costs onto businesses during a period of slowing demand.

The counterargument is that adjustment takes time. The NICs increase was a one-off step change, not an ongoing escalation. Employers may have pulled forward redundancies and hiring freezes in anticipation of the April 2025 changes, meaning the worst of the employment impact may already be in the data. The slight improvement from 5.2% to 5.0% in early 2026 could mark the beginning of stabilisation [1].

What is not in dispute is that the UK has experienced the sharpest labour market deterioration of any major advanced economy over the past year [13], that the cost is falling disproportionately on young people, ethnic minorities, and workers in small businesses [2][8][9], and that the fiscal margin for error is thin [15]. Whether this proves to be a cyclical adjustment or something more persistent depends on decisions — by policymakers, employers, and the Bank of England — that have yet to be made.