Wage rate slows as unemployment rises – what it means for YOUR wallet
AVERAGE earnings have slowed in a hit for workers, new data shows.
Average weekly earnings, excluding bonuses, was 5.6% in January to March, official figures from the Office for National Statistics (ONS) show.
Annual growth in total earnings including bonuses was 5.5%.
When adjusted for inflation, annual wage growth in real terms was 2.6% for both regular pay and total pay in January to March 2025.
Meanwhile, the unemployment rate has risen in the past quarter.
The rate of unemployment for people aged 16 years and over was estimated at 4.5% in January to March 2025.
This is above estimates of a year ago, and up in the latest quarter, when the unemployment rate was 4.4%.
But the rate of economic inactivity for people aged 16 to 64 years was estimated at 21.4% in the last quarter.
This is below estimates of a year ago and down in the last three months.
Liz McKeown, director of economic statistics at the ONS, said: “Wage growth slowed slightly in the latest period but remains relatively strong, with public and private sectors now showing little difference.
“The broader picture continues to be of the labour market cooling, with the number of employees on payroll falling in the first quarter of the year.
“The number of job vacancies has also fallen again, with the rate of decline increasing in the last few months.”
The Bank of England watches jobs and wages figures closely when making decisions about interest rates.
Last week rate-setters voted to cut the base rate from 4.5% to 4.25%.
This was only the fourth interest rate cut since 2020.
But yesterday Clare Lombardelli, deputy governor of the Bank of England, warned that wage growth is too high to meet the Bank’s inflation target.
The Bank uses its base rate as a way to bring inflation in line with its target of 2%.
But if wages grow too much this can push up inflation, making it harder for the Bank to keep it within its target.
Clare Lombardelli said: “Wage growth is still too high to be consistent with inflation at target.
“Caution remains appropriate. I’ll be more comfortable when I see material deceleration in the data over a longer period.”
Meanwhile, official figures set to be published on Thursday will reveal how much GDP has risen or fallen over the past few months.
What it means for your money
Generally speaking, lower wages are a negative for the economy, especially if they are lower than the rate of inflation.
It means households have less purchasing power and less money will go back into the economy.
Experts have blamed changes announced by Chancellor Rachel Reeves in the Budget last October for the fall in wage growth.
In the Budget the Chancellor announced that the rate of employer National Insurance contributions would rise from 13.8% to 15% on April 6.
At the same time, the National Minimum Wage rose, piling further pressure onto businesses already struggling with rising costs.
Why does inflation matter?
INFLATION is a measure of the cost of living. It looks at how much the price of goods, such as food or televisions, and services, such as haircuts or train tickets, has changed over time.
Usually people measure inflation by comparing the cost of things today with how much they cost a year ago. The average increase in prices is known as the inflation rate.
The government sets an inflation target of 2%.
If inflation is too high or it moves around a lot, the Bank of England says it is hard for businesses to set the right prices and for people to plan their spending.
High inflation rates also means people are having to spend more, while savings are likely to be eroded as the cost of goods is more than the interest we’re earning.
Low inflation, on the other hand, means lower prices and a greater likelihood of interest rates on savings beating the inflation rate.
But if inflation is too low some people may put off spending because they expect prices to fall. And if everybody reduced their spending then companies could fail and people might lose their jobs.
See our UK inflation guide and our Is low inflation good? guide for more information.
Alice Haine, personal finance analyst at Bestinvest, said: “UK pay growth eased back in the three months to March as businesses braced for Chancellor Rachel Reeve’s National Insurance rate hike for employers and the minimum wage increase at the start of April.
“While easing wage growth may not be the best news for consumers grappling with high living costs, one comforting factor is that wages are still rising faster than inflation.”
But she warned that pay growth could slow further in the coming months as the effects of the Chancellor’s new tax measures on businesses become clear.
Meanwhile, it is not yet known what the impact of US President Donald Trump‘s tariff policies will have on businesses.
In addition, many people may not feel that their wages are going as far in real terms as they are dragged into paying more tax.
Tax thresholds are frozen until 2028, which means as workers’ wages rise they are pulled into higher tax bands due to a concept known as fiscal drag.
This means that although their wage has increased, the amount of take-home pay they have has fallen.
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