This article was initially published on our Substack.

The Government has said the economy was on the right track before the Iran war, pointing to surprisingly strong GDP data for Q1 2026. The same can’t be said of the labour market. ONS stats published this morning (19 May 2026) shows a weak labour market in the first quarter of the year. Unemployment was elevated at 5 per cent, and real wage growth had ground to a halt, even before the coming inflation shock.

Unemployment remains elevated

The first couple of months of 2026 had presented a bit of a puzzle. Most indicators were pointing to a sluggish labour market with weak demand – vacancy rates were no longer falling but were below pre-Covid levels, and payroll jobs were falling. But the unemployment rate from the Labour Force Survey was pointing in the other direction. The single month estimate was 5.2 per cent in December and fell in both January (to 4.9 January) and February (to 4.6 per cent). Today’s data suggest those falls were a blip rather than a turning point. The single-month estimate for March was 5.5 per cent (the highest since 2015), giving a three-month headline figure of 5.0 per cent for Q1 2026. A useful reminder to take LFS estimates with a pinch of salt.

On some measures the labour market is weak rather than weakening. Vacancy rates are low but have not changed much since last summer (they stood at 2.2 per cent in the three months to April, compared to 2.7 per cent on average in 2019). Headline LFS unemployment is the same (5.0 per cent) as it was six months ago. But on some measures there is still evidence of weakening. This is most notable in the payroll jobs data, which continue to fall (as they have since late 2024). The ‘flash’ April estimate showed an alarming 100,000 fall in March, but previous initial April estimates have been heavily revised, so we will have to wait for more solid data.

But even putting aside the April data, falling payroll jobs alongside a growing population mean the employment rate must be falling. The figure below shows RF’s estimate of the employment rate, which is based on administrative data in the tax system and ONS population estimates. We estimate a 16+ unemployment rate in February of 60.8 per cent, substantially down on the 2023 high point of 62.0 per cent. As it happens our estimate is almost identical to the LFS estimate in this month, but the trend is very different. (A caveat to the RF estimates is that there is uncertainty about the current pace of population growth – especially in the migration numbers. We’ll update our estimates on Thursday when the ONS publish new migration data).

Real wage growth had ground to a halt even before the oil price shock

Weak demand for workers is producing slowing wage growth. Headline nominal wage growth (annual change in regular average weekly pay) stood at 3.4 per cent in Q1 across the economy as a whole, and at 3.0 per cent in the private sector. In the latest data private sector wage growth was slower still – 2.1 per cent on an annualised basis between Q4 2025 and Q1 2026.

CPI inflation in March was 3.4 per cent. This means real wage growth had already pretty much ground to a halt before the current oil price shock starts feeding into consumer spending baskets. This unfortunately marks a return to type for the UK economy post financial crisis. We are about to head into the fourth period of real wage contraction since 2008, the previous periods being the long squeeze from 2009-2014, a smaller drop in 2017, and the big fall in 2022 stemming from Ukraine war and the resulting energy price shock.

Silver lining: a weak labour market might make life easier for the Bank of England

A coming real pay crunch is bad news for workers, and weak employment data is bad news for anyone trying to find a job. Not least the large numbers of young people looking to get their careers started. According to LFS data, the share of 18-24 year olds not in full-time education or work rose to 19.8 per cent in Q1, a 13-year high.

The only silver lining in a weak labour market is that it should make it easier for monetary policy to manage the coming inflation shock. High unemployment alongside slow (and slowing) nominal wage growth makes it less likely that workers will be able to claw back real pay losses. By contrast, in 2022 when the Ukraine war shock landed, the labour market was tight. Firms’ expectations reflect this – according to the Bank of England’s ‘Decision Makers Panel’ data (the chart is from recent slides by Huw Pill), firms expectations of prices increases have gone up, but expectations of wage growth haven’t.