Unemployment is climbing, delivering a blow to any administration but particularly damaging for a government that pledged economic growth as its top priority. The jobless rate for the first quarter reached 5 per cent of the workforce—those actively seeking work—up from 4.5 per cent a year earlier, and appears to be on an upward trajectory. Meanwhile, wages continue to rise above the official 2 per cent inflation target, though at a slowing pace. Vacancies are also declining. The International Monetary Fund has marginally upgraded its UK growth forecast for this year, but only to 1 per cent.
Why is unemployment rising?
Donald Trump's conflict in Iran, though distant, has already dampened business and economic confidence. A rise in prices has eroded consumer spending power, and hopes for interest rate cuts this year have largely evaporated. Households and businesses are growing more cautious about spending and investing, while the high cost of servicing the national debt—and its sheer size—limits the government's ability to compensate. Employers are not hiring, and increased competition for jobs is tempering wage growth. Nonetheless, overall employment has actually risen—416,000 more people are in work than a year ago—though this may not persist depending on global events.
Who is hit hardest?
As with the Covid-19 pandemic and the 2008 banking crash, younger, less qualified, and less experienced workers are bearing the brunt. Youth unemployment has reached 14.7 per cent, the highest since late 2014. While it is difficult to disentangle the numbers and perhaps too early to draw firm conclusions, changes in employment law, increases in minimum wage rates, and higher employers' national insurance contributions may have played a role in depressing job prospects for those entering the labour market. Youth unemployment is notably worse in northeast England, London, and the East Midlands—with obvious political implications for insurgent parties.
What about wages?
Depending on how earnings are measured, they are still up by 3 to 4 per cent year-on-year. However, the Office for National Statistics notes that when prices and housing costs are factored in, the real increase in purchasing power for family budgets is only about 0.1 to 0.8 per cent over the past year—and the outlook is worsening in the short to medium term. Put simply, the cost of living crisis is far from over and will intensify. Inevitably, the younger working poor, less protected against inflation than pensioners and benefit recipients, will be hit hardest. Their circumstances are likely to drive them toward protest parties and away from Labour, regardless of who becomes prime minister in the coming months.
Does this mean stagflation?
The signs are certainly pointing in that direction. In recent years, inflation has become more prone to accelerate after international shocks, creating a domestic price-wage spiral. It has also proven more stubborn in the face of higher interest rates, and many economists highlight Britain's vulnerability to the current energy crisis. Although wages are barely keeping up with price rises, they remain too high for the Bank of England's Monetary Policy Committee. To bring inflation down more decisively, the economy may need to be depressed further—leading to stagnant output, low confidence, but still-rising inflation. This is an unhappy backdrop for any new leader, though when recovery does come, they might claim the credit. If wars in Iran and Ukraine end soon, the boost could be substantial. If not, the slowdown may turn into a recession—or worse.
