At first glance, the headline figures released yesterday looked like a rare bit of good news for the Treasury. If you only skimmed the top line, you might think the labour market is holding up better than expected.
Unemployment fell unexpectedly to 4.9 per cent, down from 5.2 per cent, and on paper that sounds reassuring. But once you look past the headline, the picture is much less comforting. The latest data from the Office for National Statistics suggests this is not a straightforward jobs recovery at all. It looks much more like a statistical quirk, with the unemployment rate falling not because lots of people found work, but because more people stopped counting as part of the labour force in the first place.
That distinction matters. To be classed as unemployed, a person has to be without a job and actively seeking one. If they stop searching, they are no longer counted as unemployed; they are moved into the category of economic inactivity. That is why a falling unemployment rate can sometimes flatter to deceive.
In this case, the inactivity rate rose to 21 per cent, and much of that increase appears to have been driven by students. That is the quirk sitting inside these figures. A rise in the number of students outside the active workforce can mechanically pull the unemployment rate down, even when the underlying labour market is weakening. So while 4.9 per cent made for a more cheerful headline than expected, it does not really point to a stronger jobs market.
In fact, several of the other numbers point in the opposite direction. Vacancies fell to 711,000, the lowest level in five years, which tells its own story about employer confidence. Firms are plainly less willing to hire, and in many sectors they are doing the opposite: slowing recruitment, freezing headcount or quietly trimming payrolls.
Payrolled employees fell by 11,000 in March, adding to the sense that the market is softening rather than strengthening. The broad trend is one of cooling demand for labour, not renewed momentum.
That weakness is also showing up in pay. Wage growth slowed to 3.6 per cent, the weakest reading since 2020. That matters because pay growth had been one of the few things helping households cope with a long period of high prices. A slowdown to 3.6 per cent means that support is fading. It also suggests employers no longer feel the same pressure to raise wages to attract or keep staff. When vacancies are falling and the pool of available workers looks larger, even if partly because of that statistical quirk around students, employees lose bargaining power. For workers, this is where the good-news story really starts to unravel.
The timing of the data matters as well. Much of it covers the period before the economic shock caused by the Iran war had fully worked its way through markets and business expectations. That is why there is a strong case for treating these numbers as something of a mirage. They capture a labour market that was already weakening, but they do not yet fully reflect the extra pressure now coming from higher energy costs and growing uncertainty.
Inflation is expected to come in at 3.3 per cent for March because of the war’s impact on oil prices, and that changes the wider backdrop significantly. If the labour market already looked fragile before that shock, it is difficult see how the months ahead will be easier.
There is another awkward contradiction here. Economic growth in February was 0.5 per cent, a stronger-than-expected monthly number that suggested the economy still had some life in it.
Under normal circumstances, this might have encouraged hopes that the jobs market would soon improve. But the labour data does not really back that up. Instead, it suggests growth has not translated into stronger hiring. That disconnect is one reason the latest unemployment figure feels misleading. An economy can post a decent monthly growth number and still have a labour market that is drifting sideways or worse.
All of this leaves the Bank of England in an uncomfortable spot. A softer jobs market and weaker wage growth would usually strengthen the case for rate cuts. But inflation heading back up to an expected 3.3 per cent because of the Iran war complicates that logic.
The Bank is now widely expected to hold rates at 3.75 per cent rather than move quickly to provide relief. In other words, the economy faces a nasty combination: softer hiring, weaker pay growth, and inflation that may remain too high for policymakers to respond as they otherwise might.
The result is a picture that is much less upbeat than the headline unemployment rate suggests. Yes, unemployment fell unexpectedly to 4.9 per cent. But vacancies are down to 711,000, payrolled employees fell by 11,000 in March, wage growth has slowed to 3.6 per cent, and inactivity has climbed to 21 per cent, largely because of students leaving the active labour market. That is why this looks like a mirage. The numbers cover a period before the full effects of the Iran war, and even then they point to a labour market losing steam. Far from showing a clean recovery, they suggest Britain has a shrinking pool of active workers, fewer available jobs, and very little room for optimism beneath the surface.
