For the past few months, the true impact of Labour’s increases in labour costs has been clouded by a fog of contradictory data, but the latest jobs figures suggest that murkiness could be beginning to clear.
Those who feared the rise in employers’ national insurance contributions (NICs) would lead to job losses are being proved right. The unemployment rate climbed by 0.2 percentage points to 4.5% between January and March – the highest level for nearly four years.
Concerns that the number of vacancies would drop have also come true. Employers are refusing to take on new staff, pushing the vacancy rate back towards its pre-pandemic level.
However, that’s not the whole picture, with data showing employers have begun to ease back on above-inflation pay growth. Average weekly earnings that exclude bonuses rose by 5.6% in the first three months of the year compared with the same quarter in 2024. That annual growth rate was down from 5.9% in the three months ending with February and below the consensus among City economists of a milder drop to 5.7%.
There are other ways employers could adjust to the higher NICs and national living wage increase. They could reduce profits and increase prices.
The Bank of England said last week that it expected private-sector employers to take a hit to their profits, sharing the pain with their shareholders. Unfortunately, the evidence for this is absent simply because the Office for National Statistics has not produced any data since last summer on the profitability of UK companies. So the Bank is guessing.
Forecasts for inflation are also guesswork, though there is a growing suspicion that companies that exercised their monopoly pricing power during the pandemic will again try to convince consumers they need to pay much higher prices for their goods this year. Data out on Wednesday next week on the inflation rate in April will give the first signs as to whether that theory is correct.
If lower average profits and slightly higher prices become part of the response, then you might say everyone is sharing the pain from higher employment taxes.
The problem for Labour is that the biggest hit is felt most acutely by employers in very visible areas of the economy, such as retailers, hospitality businesses and the charity sector.
Ministers must be concerned that the lower number of vacancies is colliding with a rising number of people wanting employment, making for a very large and discontented group of people who want to break into the labour market but cannot.
It all suggests the hangover from the pandemic is still causing pain in the form of huge mismatches between what employers want and what workers can offer.
The cure for this ill can only be investment in skills. Yet that is in short supply at the moment. And while Rachel Reeves blames the uncertainty caused by Donald Trump for depressing investment, and the economy more broadly, she must shoulder some of the blame.
The tightrope she must walk to stick to her self-imposed fiscal rules is clearly another factor. To balance the books in the next budget, which the chancellor says she must, is going to be tough and might mean the government needs to impose even more tax rises on employers.
If this worry persists among employers, it is sure to combine with Trump-induced uncertainty to delay any jobs recovery.
