UK unemployment falls as wages growth hits lowest in two years

The UK jobs market bucked predictions of a further weakening in June after official figures showed unemployment fell but wages growth slowed to its lowest for two years.

Unemployment unexpectedly dropped to 4.2% from 4.4% in the three months to June from the previous three months, according to the Office for National Statistics (ONS).

Related: Jobs market uncertainty causes headache for Bank of England rate setters

However, wage growth, excluding bonuses, was 5.4% year on year over the three months to June, slipping from 5.7% in the previous three months and represented the smallest increase since the period to July 2022, when it was 5.2%.

Adjusted for inflation, wages rose by 1.6%, meaning many workers will experience a continued improvement in their standard of living.

Vacancies also fell, giving a further indication that the jobs market is returning closer to pre-pandemic levels of activity.

Analysts were divided about how the figures would influence the Bank of England’s decision on interest rates when policymakers meet next month.

The National Institute of Economic and Social Research said wages growth, despite a fall, could push inflation higher, forcing the central bank to maintain interest rates at a high level for a longer period.

“The persistence of strong wage growth raises concerns about stickier inflation, which may prompt the Bank of England to remain cautious about further interest rate cuts,” it said.

Capital Economics, a consultancy, said the downward path of wages growth was enough to keep the Bank on track to make two further quarter-point cuts in interest rates this year from 5% to 4.5%.

Traders reacted positively to the figures and the pound gained almost half a cent against the dollar, or 0.33%, on Tuesday to reach $1.2809, the highest since 5 August.

Growth in total pay including bonuses fell from 5.7% to a much lower level of 4.5%, after business surveys showed employers in many sectors were proving reluctant to hire staff. However, the data is distorted by one-off bonus payments made to NHS staff in June 2023.

Inactivity remained high at 9.41 million, or 22.2% of the working age population – up 350,000 from 2023 – as people reported they were unable to work because of ill health.

Julia Turney, a partner at the consultancy Barnett Waddingham, said: “The workforce we are dealing with today is older, increasingly remote and more in touch with mental health challenges than ever before.

“In fact, earlier this year Mental Health UK found that in the past year, one in nine UK adults had experienced high levels of stress that contributed to them also taking time off work during that period.”

The chancellor, Rachel Reeves, is under pressure to increase funding for mental health services to help people back into work when she delivers her budget later this year.

She said: “Today’s figures show there is more to do in supporting people into employment because if you can work, you should work.

“This will be part of my budget later in the year where I will be making difficult decisions on spending, welfare and tax to fix the foundations of our economy so we can rebuild Britain and make every part of our country better off.”

Reeves will deliver her first budget on 30 October.

Wages growth in the finance and business services industry outpaced other sectors with an annual improvement of 6.2%.

The ONS said: “The construction sector saw the smallest annual regular pay growth across sectors, at 3.5%. In April to June 2024, the manufacturing sector saw the largest increase in pay, including bonuses at 6.7%.”