UK unemployment rate unexpectedly rises to 5% as Iran war puts pressure on businesses
The UK unemployment rate climbed back to 5% in the three months to March while wages grew at the slowest rate in almost six years.
Unemployment rose in the three months to March, reversing a drop in February, as official figures start to show the impact of the Iran war on the UK labour market.
The UK jobless rate was 5% in the quarter to March, according to the latest figures from the Office for National Statistics (ONS), up from February’s reading of 4.9%.
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The number of vacancies in the UK fell in March too – there were 104,000 fewer job openings than at the same time last year, a dip of 0.3%, and 28,000 fewer than February (0.1%).
March’s dip in job openings has brought vacancies to a five year low.
Liz McKeown, director of economic statistics at the ONS said: “Latest figures suggest the labour market remains soft, with vacancies at their lowest level in five years and unemployment higher than a year ago.
“The number of payroll employees continued to fall in the three months to March, while regular wage growth slowed further.”
She said: “The Middle East conflict is taking its toll on the UK labour market. Businesses are becoming more reluctant to take on the expensive long-term fixed costs of permanent hires amid the unstable economic backdrop and the threat of inflation which will increase cost pressure for companies.
“The combination of rising prices and higher unemployment raises concerns about a painful stagflation scenario.”
The ONS’s figures show youth unemployment has reached an 11-year high as the number of people aged 16 to 24 without a job has climbed to 16.2%, the highest level since January 2015.
Youth unemployment has been on the rise since it reached a recent low of 9.2% in July 2025, with some blaming the government’s decision to increase the cost of hiring in the 2024 Budget.
Wages grow at slowest rate for six years
While unemployment is rising, the rate of wage growth is falling, with the latest figures from the ONS showing it is at its lowest level in six years.
Earnings grew by an average of 3.4% (excluding bonuses) in the year to March. When including bonuses, wages grew by an average of 4.1% in the same time period.
The figures also show a significant disparity between wage growth in the public and private sectors.
Public sector pay, excluding bonuses, grew by 4.8% or 4.9% when including bonuses, while private sector workers saw their wages grow by an average of just 3% excluding bonuses and 3.9% including them.
When adjusted for inflation, real wage growth was just 0.1% without bonuses, and 0.8% including bonuses.
Susannah Streeter, chief investment strategist at Wealth Club, said: “Wage growth is still only just inching ahead of inflation, and by a meagre amount. This is likely to keep spending subdued, particularly as households brace for more bill increases ahead.
“This is likely to keep a lid on discretionary purchases, with retailers and hospitality firms particularly vulnerable if consumers continue cutting back on bigger-ticket purchases and prioritising essentials.”
What does a softening labour market mean for interest rate cuts?
While a softening labour market is usually bad news for workers, the silver lining is that it acts as a downward pressure on inflation, as prices rise slower when demand dips.
This is why the Bank of England pays such close attention to labour market statistics, as they can provide crucial information about whether or not the Monetary Policy Committee (MPC) should cut, hike, or hold interest rates.
Streeter explained that under normal circumstances, labour market statistics like this most recent set “would be the kind of mood music likely to prompt expectations of interest rate cuts.”
However, the economic shockwaves of the Iran war mean a rate cut is very unlikely in the coming months, with pressure building for the MPC to hold rates for longer.
Sanjay Raja, chief UK economist at Deutsche Bank, added: “This is the sort of data that will allow the MPC to stay on hold for longer while it digests the impact of the Iran conflict.
“The rise in unemployment combined with the slowdown in wage pressures will buy the MPC more time. Importantly, the debate around two-sided risks to the economic outlook will only grow from here.”
