Unemployment rates in the UK have unexpectedly surged to 5% in the three months leading up to March, an increase from 4.9% recorded in February. This shift signals a troubling trend as businesses grapple with the ramifications of the ongoing war in Iran, which has intensified pressure on wages and jobs. The latest figures from the Office for National Statistics (ONS) reveal significant changes in employment patterns, raising concerns about the future of the labour market.
Unemployment Figures Surge
According to the ONS, the unemployment rate rose in the first quarter of the year, defying expectations from City economists who had anticipated stability. The latest data shows a stark drop of 100,000 in the number of payrolled employees in April, following a previous decline of 28,000 in March. This represents the largest monthly decrease since records began in 2014, excluding the pandemic period.
Suren Thiru, chief economist at the Institute of Chartered Accountants in England and Wales, highlighted the growing distress within the labour market. “These figures indicate that soaring labour costs and the fallout from the Iran war are prompting businesses to curtail recruitment and limit wage increases,” he explained. The decline in job vacancies, which fell by 28,000 to 705,000, marks the lowest level seen in five years, raising alarms about the overall demand for labour.
Wage Growth Slows
The latest data also reveals that wage growth has eased, registering at 3.4% year-on-year in the three months to March, down from 3.6% in February. While this aligns with economists’ forecasts, it marks the slowest growth rate since October 2020. After accounting for inflation, real wages have barely increased, growing by just 0.3%. When including bonuses, wages saw an increase to 4.1%, up from 3.8% in the previous quarter.
Yael Selfin, chief economist at KPMG, warned that employees are likely to face a sustained decline in real pay. “With inflation expected to outpace earnings due to rising energy and food prices, workers will struggle to secure wage settlements that can compensate for these increased costs,” she noted. The Resolution Foundation has painted a bleak picture for the future of wages, suggesting that the war will exacerbate inflation, leading to a reduction in real pay for the fourth time in less than two decades.
Impact of the Iran War
The conflict in Iran, which escalated on 28 February, has begun to show its effects in this month’s data. The accompanying rise in global oil and gas prices, largely due to the effective closure of the Strait of Hormuz, is a key factor in the economic turmoil.
The data reveals that young people are particularly vulnerable, with unemployment among 18 to 24-year-olds climbing to 14.7%, the highest level since November 2014. Research from the Institute for Fiscal Studies indicates that only half of 16 to 24-year-olds were in paid employment at the end of 2025, citing increased employment costs and the influence of artificial intelligence on job availability.
In response to these challenges, Work and Pensions Secretary Pat McFadden emphasised the government’s commitment to enhancing opportunities and tackling youth unemployment, acknowledging the shadow cast by the conflict in the Middle East.
Economic Outlook Mixed
The broader economic landscape presents a mixed picture. While surveys indicate that consumers are feeling the pinch of rising inflation and are reducing discretionary spending, the ONS reported a surprising 0.3% growth in the UK economy in March, with a 0.6% growth for the first quarter of the year. This unexpected growth prompted the International Monetary Fund to raise its UK growth forecast from 0.8% to 1% for 2026, attributing it to the economy’s “strong pre-war momentum.”
Despite these positive indicators, the Bank of England projects an increase in unemployment, expecting it to reach 5.1% by mid-2026 and potentially rise to between 5.5% and 5.6% by summer 2027. The ONS also reported a more volatile monthly unemployment rate spiking to 5.5% in March, the highest since May 2015.
Why it Matters
The rising unemployment rate and slowing wage growth are significant indicators of the pressures facing the UK economy, particularly in light of global events like the Iran conflict. As businesses struggle with increased costs and uncertainty, workers, especially the younger demographic, are likely to face escalating challenges in securing stable employment and fair wages. This situation not only affects individual livelihoods but also raises concerns about the overall health of the UK economy as it navigates these turbulent waters. Policymakers will need to act swiftly to address these issues to restore confidence and stability in the labour market.
