Faulty jobs data leaves UK hiring picture uncertain, economists say

UK ministers are set to raise the cost of hiring at a time when a void in official data will make it hard to assess the hit to jobs, economists say.

In the Budget on Wednesday Rachel Reeves is expected to announce higher national insurance contributions for employers, a measure that is liable to mean fewer jobs or lower wages over time. She is also likely to set out a pay boost for young people on the minimum wage as she seeks to stabilise the public finances while protecting “working people”.

Meanwhile, official estimates suggest the government’s employment rights reforms will cost businesses up to £5bn a year, to workers’ benefit, with the impact concentrated on low-paying sectors such as hospitality.

But the impact of these changes will depend on the state of the jobs market, which is clouded by uncertainty because of long-running problems with the Office for National Statistics’ labour market survey.

“It is a really bad problem. If you don’t know [the unemployment rate], it’s hard to know if you can put up the minimum wage lots or not,” said Tim Leunig, professor at the London School of Economics and a former government adviser.

“When jobs are scarce, higher qualified people can trade down: those on minimum wage cannot and the result is unemployment,” he said. “I’m worried about people at the bottom end.”

Assessing the risks of increasing the minimum wage, which this year rose by 9.8 per cent to £11.44 per hour for adults, is harder than usual at present. This is because of big discrepancies between data based on the LFS — the only source of information on unemployment and economic inactivity — and alternative indicators of employment, such as tax records, job adverts and business surveys.

The official LFS-based figures suggest the UK unemployment rate has fallen since the start of the year to 4 per cent, a historically low level, but that the workforce remains smaller than before the pandemic because ill health and disability are keeping many people on the sidelines.

No other rich economy has registered a decline in its workforce since 2020. The perception that the UK has a unique problem of rising inactivity, fuelling wages and labour shortages has made the Bank of England more wary of cutting interest rates and led ministers to focus on boosting employment.

But the ONS paused publication of the LFS a year ago, because response rates had fallen so low that survey results became too volatile to trust. Although the agency is now publishing the figures again, they are not badged as official statistics and economists view them as unreliable.

Other data sources show a very different trajectory, according to analysis by the Resolution Foundation think-tank. They suggest the employment rate had returned to its pre-pandemic high by 2022, but that hiring has weakened and the jobless rate edged up in the past few months owing to high borrowing costs and uncertainty over government policy.

In May, BoE chief economist Huw Pill wrote to the ONS highlighting this discrepancy, underlining the urgency of fixing the LFS and the impact its poor quality was having on interest rate decisions.

Relative to other data sources, the LFS was “still missing millions of workers”, he said, meaning “a substantial increase in uncertainty for policymakers at a crucial time for the economy”.

Nye Cominetti, principal economist at the Resolution Foundation, said the picture between the LFS and other indicators “couldn’t be more different”. The lack of clarity was a big problem for the BoE but also made it harder to calculate how high the minimum wage could rise without damaging employment, he added.

The independent Low Pay Commission will next week send ministers its recommendations on where to set minimum wage rates from April next year, leaving it open for Reeves to announce the new rates in the Budget.

The body will be making its recommendations under a new government-set remit, which asks it to maintain the main adult rate at no less than two-thirds of median hourly earnings — a level that makes the UK’s wage floor one of the highest among rich economies.

The LPC said in September that it expected an increase in hourly pay of 5.8 per cent to £12.10 would be needed to meet this target, although it had not finalised its forecasts.

But the commission has also been asked to raise the rate for 18- to 20-year-olds, currently £8.60 per hour, towards the main adult rate, while setting rates for under 18 and apprentices as high as possible without hurting their job prospects.

This is a delicate judgment, because young people are seen as more likely to be priced out of a job than experienced workers, and to suffer lasting harm if they are unemployed at a crucial time in their career.

Data on job postings suggests school leavers and graduates are entering one of the toughest job markets for decades, with record numbers of applicants per vacancy. The LFS-based data suggests youth unemployment has risen this year even as the overall jobless rate fell.

Last year, the LPC warned that the problems with the LFS had made its work more difficult and uncertain. It also called attention to similar problems affecting a separate ONS survey on earnings, which it relies on as the only official source of detailed information on hourly pay.  

The Treasury has previously declined to comment on Budget speculation. The ONS said it expected a “notable improvement” in the quality of LFS-based statistics from the first quarter of 2025, as its work to boost responses and reweight the data took effect.

Both the BoE and the LPC said they were now using a range of alternative data sources to reach their own judgments on the labour market. But Alan Manning, professor at the London School of Economics, said problems with the LFS would “quite probably” make the commission’s judgment on where to set minimum wages riskier.