UK unemployment falls to 4.9% – but SME employment poses deeper challenges for small businesses
The unexpected fall in Britain’s unemployment rate to 4.9 per cent was taken by Number 11 as evidence that the economy has entered the spring on a strong note. Business owners reading the small print of Tuesday’s labor market statistics will find precious little to celebrate.
The latest figures from the National Bureau of Labor Statistics showed the rate fell from 5.2 per cent in the previous quarter to 4.9 per cent in the three months to February, ahead of City forecasts. But this improvement owes more to statistical wisdom than any underlying strength in hiring, as vacancies fell to a nearly five-year low of 711,000 and payrolls shed 11,000 workers in March alone.
For Britain’s small and medium-sized businesses, the data highlights the growing value of a £25 billion increase in the autumn to national employer’s insurance premiums. Since chancellor Rachel Reeves unveiled the increase in October 2024, paid workers have contracted by 143,000, a figure that offsets the heavy burden borne by small firms with small budgets to meet wage costs and rising tax cuts.
Wage growth has now fallen to its weakest level since the height of the pandemic. Average wages rose 3.6 percent in the three months to February, down from 3.8 percent, while the private sector posted growth of 3.2 percent, the lowest reading since October 2020, in stark contrast to the 5.2 percent enjoyed by civil servants. For owner-managers across hospitality, retail and professional services, the squeeze on private equity is a clear sign, however, that rental confidence is out of order.
These figures predate the outbreak of the US-Israel war with Iran in late February, leaving the headline numbers looking distinctly fragile. Ashley Webb, senior UK economist at Capital Economics, said the latest payrolls and job vacancies data provided “early signs that rising energy prices as a result of the Iran war are impacting business hiring plans and that is leading to an improvement in wage growth”.
The International Monetary Fund has warned that the United Kingdom will be the most vulnerable of the G7 economies to the conflict, due to its excessive exposure to international gas prices. Inflation figures due on Wednesday are expected to show the price level rising to 3.3 percent in March, from 3 percent in February, a development that will make the cost-of-business balance more difficult for the country’s 5.5 million SMEs.
A close reading of the ONS output reveals slightly flatter currents. Economic unemployment, those of working age who are not working or not actively looking for it, rose to 21 percent from 20.7 percent, and another 116,000 people dropped out of the labor market altogether. Liz McKeown, director of economic statistics for the ONS, said the change was largely due to “fewer students looking for work and their studies”.
Take out that math problem and the picture gets much darker. The number of unemployed people fell by 88,000, but employment of 16 to 64-year-olds actually fell by 5,000. An increase of 17,000 jobs among those aged 16 and over suggests that it is older workers, rather than those of normal working age, who are picking up steady jobs. In short, the labor market is shrinking at the edges while the headline rate praises its health.
For SME owners weighing recruitment initiatives against rising input costs, there is a silver lining in Threadneedle Street. As the Bank of England’s monetary policy committee meets next Thursday, a sluggish labor market may tip the balance towards holding the key rate at 3.75 percent, or even cutting it later this year, rather than tightening the fight against Iran-driven escalation. Cheap credit can’t make up for a tax hike or a lost customer, but for businesses that offer variable rate credit it can at least provide some relief.
Whether that proves cold comfort depends largely on how long the Gulf disturbance lasts. Meanwhile, the number of headline jobs suggests a labor market that, if you look closely, is improving, and the small business community knows it.
