The UK job market appears to be stabilising following a period of increased unemployment that was largely attributed to recent tax hikes initiated by Chancellor Rachel Reeves.

As Reeves prepares to unveil her budget on 26 November, new figures from the Office for National Statistics (ONS) show that the unemployment rate edged up to 4.8% in the three months to August, compared to 4.7% in July. Economists had anticipated the rate would remain unchanged during the period.

Additional data from HM Revenue and Customs (HMRC) revealed a drop of 10,000 in the number of people on company payrolls in September. Still, the ONS noted that the labour market appears to be finding its footing after earlier, more pronounced job losses, which were linked to tax increases that came into effect in April.

“Following a stretch of limited hiring, there are now indications that the recent falls in payroll employment and job vacancies are beginning to stabilise,” explained Liz McKeown, director of economic statistics at the ONS.

For August, the initial drop in payroll numbers was revised upward by the ONS—from an 8,000 decrease to a 10,000 increase—showing relative stability for a total workforce of 30.3 million people. Meanwhile, job vacancies declined by 9,000, reaching 717,000 in the quarter ending September, which marked the second smallest drop since mid-2022.

The annual growth in regular earnings, excluding bonuses, slightly slowed to 4.7% in the three months to August from the previous 4.8% figure, in line with economists' expectations.

The data also showed that wage growth in the private sector declined to its weakest level in nearly four years, while public sector wages increased. Public sector pay rose by 6%, offsetting the slower 4.4% growth observed in the private sector, largely due to earlier-than-usual pay awards.

Overall wage growth climbed unexpectedly from 4.8% (revised) to 5%, indicating continued strength in earnings despite reduced job market momentum.

Martin Beck, chief economist at WPI Strategy, commented, “Higher employer national insurance contributions and the substantial rise in the national living wage earlier this year clearly impacted hiring. However, the summer’s numbers suggest the most severe effects may now be passing.”

“That said, the jobs market is still more vulnerable than it has been in several years,” Beck added.

The ONS data is drawn from its labour force survey, which has faced criticism for low participation rates. Some analysts warn that this may lead to unreliable insights, making it harder for decision-makers to rely on the findings.

While Reeves is expected to announce further tax measures in the upcoming budget, business leaders caution that a sluggish economy could limit her ability to increase taxes without causing negative economic effects.

Business organisations have urged the chancellor to avoid additional tax hikes and instead take steps to promote economic growth. Alex Hall-Chen, employment policy lead at the Institute of Directors, stated, “A new policy direction is essential if the government wants to stimulate growth and support job creation.”

Work and Pensions Secretary Pat McFadden noted that the latest job figures show more people are engaged in work or seeking employment. “Nevertheless, too many individuals remain excluded from the workforce or training opportunities, missing the stability that a good job provides,” he said.

Steady wage increases have created a dilemma for the Bank of England, as they contribute to inflation and make it more difficult to cut interest rates. A noticeable drop in employment could, however, suggest that economic conditions are worsening, potentially prompting quicker rate reductions.

Despite these developments, the Bank of England held rates steady at 4% last month, as it monitors inflation risks. This decision came amid signs of a slowing job market and weakening economic growth.

Ashley Webb, economist at Capital Economics, said he believes the Bank will likely refrain from lowering interest rates again this year. “The job market is gradually cooling, but wage growth is only slowly decreasing. This likely means the Bank will remain more focused on inflation concerns rather than slowing economic activity,” he remarked.