Wage growth has fallen to its lowest level in more than five years, as official data points to a labour market that is steady on the surface but facing growing pressure beneath.
Figures from the Office for National Statistics released on Thursday show regular pay rose by 3.8 percent in the three months to January, down from 4.2 percent previously. The unemployment rate remained unchanged at 5.2 percent.
The data suggests employers are holding back on pay increases as hiring demand cools, even as overall employment conditions show little immediate change.
Labour market steady but showing signs of strain
Liz McKeown, director of economic statistics at the Office for National Statistics, said the overall picture had remained largely unchanged. “Labour market conditions were little changed at the start of the year. The number of workers on payroll rose slightly in the latest month but, overall, the recent picture has been broadly flat,” she said.
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She said unemployment had edged up over time while vacancies remained stable. “Unemployment remains at the rate reported last month, up on the quarter and the year, while the number of vacancies remains largely stable, with declines among smaller firms being offset by rises among larger ones,” she said.
“Regular wage growth is at its lowest rate in more than five years, with pay growth in both the private and public sectors continuing to ease.”
Vacancies stood at around 721,000, reflecting a slight decline, as businesses balance cautious hiring with ongoing skills needs.
Youth unemployment reaches highest level in over a decade
James Cockett, senior labour market economist at the Chartered Institute of Personnel and Development, the professional body for HR and people development, said young people were facing increasing difficulty entering the workforce.
“Unemployment among 18-24-year-olds, has hit its highest rate since 2015 as the jobs market becomes increasingly challenging for young people,” he said in comments provided to HRreview. “Nearly 600,000 18–24-year-olds are out of work but looking for work, a huge waste of their potential. This is ahead of the significant uplift to the youth minimum wage rates, coming into effect in just two weeks’ time, further raising the costs of employing young people.”
He said recent government measures were a step in the right direction. “We welcome the Government’s renewed focus on tackling youth unemployment by supporting more young people into work, particularly through new incentives to help employers of all sizes create entry-level jobs and apprenticeships, announced earlier this week. Many of these measures reflect changes we have been calling for, including stronger support for employers to create high-quality opportunities and more flexible routes into work for young people.”
Cockett said clarity would be key to making the schemes effective. “The Government should ensure that the process for claiming these incentives are simple and clearly communicated, particularly to small and medium sized businesses, which will result in a higher uptake,” he said.
“While these are positive steps towards tackling youth unemployment, today’s ONS figures still paint a dismal picture of the current challenges, highlighting the need not just for more entry level jobs but a firm foundation of training and skills development,” he said.
He said an apprenticeship guarantee could help improve outcomes. “To address this, we would still like to see young people and employers benefit from an apprenticeship guarantee that would apply to all 16-24-year-olds in the UK that meet minimum requirements. Such a move is overwhelmingly supported by employers and will help young people start working life in a meaningful way, while building a strong pipeline of skilled talent in the UK.”
Employers warn of fragile outlook
Michael Stull, UK managing director of global recruitment firm ManpowerGroup, said the figures pointed to a market that was stable but under pressure.
“Today’s ONS release shows unemployment at 5.2%, suggesting caution continues to dominate the labour market. Vacancies at 721,000 (down 0.8%) highlight that hiring remains conservatively balanced,” he said.
“Meanwhile wage growth at 3.8% for regular pay and 3.9% for total pay, with real earnings at 0.4%, points to a labour market where wage inflation is not reducing fast enough to provide relief for employers. Overall, the labour market is stable, yet fragile.”
Stull said recent global developments were already affecting business confidence. “Having said this, the data looks steadier than the present-day reality that businesses are facing. The start of 2026 brought a cautious optimism, both in terms of conversations with clients and the placements being made.
“This feeling was echoed in our MEOS Q2 2026 research, with 27% of businesses forecasting hiring and 47% citing expansion into new areas of growth. However, this optimism has been thwarted by recent global events placing higher expectations on inflation and general uncertainty for businesses. In the immediacy, this will cool hiring,” he said.
“Navigating the months ahead, flexibility and agility will be critical for competitive advantage. An adaptable workforce, use of temporary labour and modular workforce models are going to be key. Having said this, regulatory pressures may make this flexibility more challenging, precisely at the time when it’s going to matter most,” he said.
Wage slowdown may not signal downturn
Some employers argue the slowdown in pay growth reflects a normalisation rather than a sharp deterioration.
Peter Briffett, chief executive of Stream, a workplace finance platform, said the figures needed to be viewed in context.
“Today’s ONS data confirms what Stream’s real-time payroll data has been showing for the past month. We’ve seen wages rising at 3.8% year-on-year across more than 320,000 workers. But the headline slowdown isn’t the alarm bell it might look like,” he said.
“A significant chunk of it is mechanical: April 2024’s 9.8% National Living Wage rise inflated last year’s comparison base, so some compression in year-on-year growth was expected. Workers are still earning more in absolute terms. The rate has simply normalised.”
He added that the new ONS figures did not “tell the full story, which varies significantly by sector. Our data shows retail workers are actually seeing 4.7% growth, a relatively bright spot in an otherwise softening picture.
“Hospitality is different, not because wages are falling faster, they’re not, but because the sector is already running on thin margins with weaker consumer demand. A 3.6% wage increase hits hospitality harder than most.”
The latest data come as policymakers weigh up their next move on interest rates, with uncertainty around inflation and global events likely to influence decisions in the months ahead.
William Furney is a Managing Editor at Black and White Trading Ltd based in Kingston upon Hull, UK. He is a prolific author and contributor at Workplace Wellbeing Professional, with over 127 published posts covering HR, employee engagement, and workplace wellbeing topics. His writing focuses on contemporary employment issues including pension schemes, employee health, financial struggles affecting workers, and broader workplace trends.
- William Furney
- William Furney
- William Furney
- William Furney
