Emeritus Professor Joe Nellis is economic adviser at MHA, the accountancy and advisory firm.
· An uncertain environment and increased business costs are slowing recruitment.
· AI is not yet producing substantial productivity gains, but firms are preparing for it and hiring cautiously.
· High youth unemployment could have permanently damaging effects.
· Wage growth continues to fall, threatening a decline in real wages.
The unemployment rate held at 5.2% in the three months to January 2026, its highest level since February 2021, as the labour market continues to show signs of weakness.
Higher unemployment reflects a business environment that has become more uncertain. Businesses continue to face higher operating costs, tight financing conditions and weaker demand. Conflict in the Middle East only adds to the uncertainty, as higher inflation means UK businesses could face additional costs in the months ahead. These pressures are encouraging many firms to take a more cautious approach to hiring.
The seemingly perennial question persists — is AI weakening the labour market? The answer is yes and no. The vast majority of businesses are not yet harnessing AI to the extent that it is creating substantial productivity gains and leading them to shed roles deemed obsolete. Yet businesses are preparing for this to be the case, with this feeding into their recruitment decisions, particularly when it comes to graduates and young people more generally.
This is a real worry for the future of the workforce. Youth unemployment remains high, recorded at 16% in January. There is a fear of permanent economic dislocation, as young people don’t enter the workforce and fail to develop the skills that increase their employability.
The Bank of England will be pleased that average earnings excluding bonuses rose by only 3.8% in January, down from 4.2%. However, despite wage-driven pressures cooling, forecasts of rising inflation mean this won’t be leading them to an interest rate cut any time soon. The larger worry now is wage growth falling below inflation, meaning workers see a fall in their real wages. As living costs remain elevated, real wage growth declines, and unemployment rises, the threat of households suffering from a more severe cost-of-living crisis intensifies.
