Unemployment in the UK has unexpectedly risen to 5% while wage growth has slowed, according to official figures, in the first snapshot of how companies are reacting to the impact of the Iran war.

The Office for National Statistics (ONS) said the rate of unemployment was up in the three months to March, from 4.9% in the three months to February, a rate that City economists had expected to hold steady.

More up-to-date tax data showed the number of payrolled employees dropped sharply in April, falling by 100,000, after a 28,000 decline in March. The fall was much sharper than expected and the biggest monthly decline since records began in 2014, excluding during the pandemic.

Vacancies also fell to their lowest level in five years, with a decline of 28,000 to 705,000 for February to April.

Suren Thiru, the chief economist at the Institute of Chartered Accountants in England and Wales, said: “These figures signal a growing distress within the UK’s labour market as soaring labour costs and the fallout from the Iran war drive more businesses to reduce recruitment and limit pay awards.

“The continued fall in job vacancies is a worrying sign of the strength of the labour market as it suggests that demand for staff is deteriorating quickly amid global headwinds and the growing financial squeeze on firms.”

Excluding bonuses, wage growth was 3.4% year on year in the three months to March, down from 3.6% in February. While this was what economists had been expecting, it was still the slowest growth since the three months to October 2020. After taking inflation into account, wages grew by just 0.3%.

Including bonuses, wages increased by 4.1%, from a rise of 3.8% in the previous quarter.

Yael Selfin, the chief economist at KPMG, said “Workers are likely to face a period of declining real pay, as headline inflation is set to outpace earnings, driven by higher energy and food prices. Unlike the 2022 energy shock, the weaker labour market is expected to limit workers’ ability to secure higher pay settlements to offset rising costs.”

The Resolution Foundation, a thinktank, said the outlook for wages looked “bleak”. It said: “With the war set to push up inflation over the coming months, pay packets are set to start shrinking in real terms for the fourth time in less than two decades.”

The Iran war began on 28 February, making this the first full month of official data to show how employers have responded to rising energy costs. Global oil and gas prices have risen sharply due to the effective closure of the strait of Hormuz.

The ONS data also suggested that young people were bearing the brunt of cutbacks in the labour market. The unemployment rate for 18- to 24-year-olds rose to 14.7% in the three months to March, the highest level since November 2014.

Separate analysis from the Institute for Fiscal Studies showed that only half of 16- to 24-year-olds were in payrolled employment at the end of 2025. The IFS attributed this to rising employment costs, artificial intelligence replacing some jobs, and worsening mental health among young people.

The work and pensions secretary, Pat McFadden, said: “We know the conflict in the Middle East is casting a shadow on the labour market … boosting opportunity and tackling youth unemployment in every area remains our priority.”

The emerging picture of how the UK economy has been faring since the start of the Middle East conflict has been mixed. Surveys have suggested consumers are fearful of rising inflation and are cutting back on discretionary spending, while businesses have reported sharp rises in input costs. However, figures from the ONS released last week showed the UK economy grew by 0.3% in March and by 0.6% over the first quarter.

This unexpectedly high GDP figure caused the International Monetary Fund to increase its UK growth forecast for 2026 on Monday, from 0.8% to 1% in 2026, to reflect the UK’s “strong prewar momentum” and a robust performance in the first quarter of the year.

However, the Bank of England expects unemployment to hit 5.1% by the middle of this year and then rise to between 5.5% and 5.6% by the summer of 2027, based on current estimates of how the Iran war might affect the UK economy.

The ONS said on Tuesday that the more volatile monthly unemployment rate shot up from 4.6% in February to 5.5% in March, the highest level since May 2015.