UK Labour Market Analysis by DWF Employment Expert
In Q2 2025, the UK labour market has experienced notable trends influenced by the broader economic climate, employment rates, job vacancies, and recruitment challenges.
The UK economy, while continuing its modest growth trajectory, is facing economic uncertainty and fiscal tightening. With GDP growth forecasted at around 1.0-1.2% for 2025 and 2026, the early part of the year saw some frontloading of exports, particularly to the US, which boosted growth temporarily. However, underlying demand has been weakening [1][2][3][4].
Inflation pressures are still present but beginning to ease, with wage inflation and services inflation expected to moderate. The Bank of England is anticipated to continue easing monetary policy gradually, aiming to lower interest rates to around 3.75% by year-end, to stimulate investment and consumption [2][3][4].
Employment growth has softened notably in Q2 2025, partly as a consequence of government measures such as increased taxes on employers implemented in April 2025. Over the past 12 months leading to Q2, the UK lost approximately 280,000 jobs, indicating a cooling labour market [2][4]. Forward-looking surveys and economic activity indicators signal a further deterioration in the labour market ahead, reflecting subdued demand particularly in manufacturing and restrained consumer spending [2][4].
With employment growth slowing and jobs being shed, demand for labour has also softened. However, businesses still face recruitment challenges due to mismatches in skills and continuing uncertainty [1][2]. Higher labour costs following government fiscal policies have contributed to suppressed business investment, exacerbating recruitment difficulties as firms are cautious to expand their workforce despite vacancies [1][2].
The UK labour market is facing ongoing economic challenges, with the estimated number of vacancies in March to May 2025 being 736,000 [5]. This marks the 35th consecutive quarterly decline in vacancies [6]. Labour-intensive sectors like hospitality, retail, and manufacturing are likely to face the greatest challenges in the near term [7].
Clear communication and maintaining transparency are important components for employers in navigating this challenging period. More people classified as "economically inactive" are seeking stable employment. The annual growth in total earnings including bonuses was 5.3% in February to April 2025, while the annual growth in employees' average regular earnings excluding bonuses in Great Britain was 5.2% in the same period [8]. The UK employment rate was estimated at 75.1% in February to April 2025 [9].
In conclusion, Q2 2025 UK labour market trends reflected a cooling employment environment driven by modest economic growth, fiscal tightening, and subdued demand, resulting in job losses and ongoing recruitment challenges despite continued inflationary pressures easing [1][2][3][4]. Global political uncertainty and major changes in employment legislation are contributing to significant turbulence in the employment market. Fostering a positive workplace culture and employee engagement is essential for employers to navigate this challenging period. Talent retention programmes that don't demand considerable immediate expenditure are being focused on by many employers.
References: [1] Office for Budget Responsibility (2025). Economic and fiscal outlook - March 2025. Available at:
The UK's economic climate, featuring fiscal tightening and moderate GDP growth, has been affecting the nation's businesses and finance sector. In the face of increased taxes on employers and higher labor costs, businesses are experiencing recruitment challenges due to talent retention concerns in the cooled labour market.
