What is the UK labour market?

The labour market, also known as the jobs market, refers to the supply of and demand for labour, and is reflected in several key indicators:

1. Employment – number of people in paid work.
2. Unemployment – number of people without a job who have been actively seeking work.
3. Economic inactivity – number of people who are neither working nor looking for a job.
4. Vacancies – number of positions for which employers are actively seeking recruits from outside their organisation.
5. Pay growth – estimates of earnings and pay generally cover three main areas: basic pay, overtime and bonuses.

How does the labour market affect people and businesses?

A business needs people to help the day-to-day running of the operation. A shortage of labour can cause difficulties by preventing the business from growing as fast as it would like and facing higher labour costs as it competes for a limited number of available workers.

On the other hand, businesses may look to invest further in staff training and new technology where feasible, instead of recruiting.

The hit to people’s incomes and wider consumer confidence during periods of high unemployment also hinders the wider economy by weakening consumer spending, a key driver of UK GDP. The Bank of England, when setting interest rates, watches developments in the UK labour market closely because it’s a source of inflationary pressures, particularly pay growth.

What is the state of play?

UK labour market conditions remain muted. While the unemployment rate has eased slightly (see chart 1), wage growth is slowing (see chart 2) and the number job vacancies – a good indicator of demand for labour – has fallen sharply over the past year. Small firms highlight labour costs as a key factor in scaling back hiring. Vacancies are falling in most sectors, with the largest declines in construction.

What is the outlook for the UK labour market?

In its latest October 2026 Economic and Fiscal Outlook, the Office for Budget Responsibility (OBR) projects that the UK unemployment rate will average 5.0% in 2026. This reflects high employment costs for businesses and a growing shift towards automation.

What are some of the main challenges it faces?

• Low labour supply – adds to inflationary pressures and stunts GDP growth.
• High economic inactivity – holding back GDP growth and productivity, and limiting improvements in living standards.
• Technology and the growing adoption of AI – impacting the demand for workers, particularly entry-level roles.
• Policy interventions – tax rises and minimum wage hikes could mean higher unemployment by increasing business costs and triggering weaker customer demand for products and services.
• Lack of a clear strategy to tackle skills shortages – means it remains a big challenge for businesses and the public sector, limiting their ability to adapt to a changing economy.