Bulletin: Labour market facing challenges

Labour market challenges

The latest ONS Labour Market Overview confirms a cooling job market.

• Unemployment has risen slightly to 4.5%, the highest level since mid-2021.

• The number of unfilled vacancies continues to fall (down 42,000) and is now below pre-Covid levels.

• Employment is falling – fewer people are on payrolls

• Wage growth is still strong at 5.6%, but easing compared to previous months.

Download the latest FREE Viewpoint report, How to respond to rising costs in 2025, which explores rising costs and their impact on retail and Away From Home food and drink inflation, plus economic, consumer and policy insights.

IGD opinion

While the latest figures aren’t reassuring, they’re also not unexpected given the economic climate. Business costs remain high, and growth is sluggish, so a cooling labour market was almost inevitable.

For retail and consumer-facing businesses, the outlook is especially challenging. A weaker labour market typically translates to cautious consumers and lower demand, impacting sales and spending patterns.

That said, perspective matters. The current 4.5% unemployment rate is far below the 8.5% seen in 2011, a reminder that things have been far worse.

The urgent priority now is reversing the trend—getting people back into work and stabilising the job market. Government policies are targeting this, but the question remains: Will they be enough?

Labour supply and immigration

The government proposes to tighten immigration rules.  The focus is on highly skilled, high-paid workers. Food businesses may not benefit.

Key changes will include:

• Higher skill requirement - Minimum level for raised to RFQ6 (graduate level)

• Higher minimum salary threshold

• Shortage role exemptions scrapped – No more special salary arrangements

• Fast-track settlement – Only for high-skilled, high-contribution individuals

• A new Labour Market Evidence Group (LME Group) to guide policy development

• Higher standards for English, for both migrants and dependents

IGD opinion

It is clear that the government aims to be more selective and demanding of both immigrants and their employers. Historically, the UK food system has relied heavily on immigrants, both temporary and permanent, especially in lower-paid and entry-level roles.

Changes made under previous governments ended much of this movement, focusing on high-skilled, high-paid roles instead. This left many food system employers with a labour challenge. The new white paper continues to focus on workers seen as high value, so it is not clear that food system employers will see much benefit.

The key new element for the food system may be the LME Group. This will gather evidence of how the labour market is working and what strategy interventions will be needed.

Importantly, business sectors with high reliance on migrant workers will be expected to show that they have a plan to develop local talent.

Businesses will also be required to show that they are following their plans. It is not obvious that the food system will be included in this … but it might well be.

New US/China agreement

The US and China have held trade talks in Switzerland. They have agreed to cut reciprocal tariffs by 115% for a period of 90 days, with effect from 14 May.

• This will reduce US tariffs on Chinese goods from 145% to 30%.

• Chinese tariffs on US goods will fall from 125% to 10%.

IGD opinion

This deal is good news for both sides – neither has the economic leeway to engage in brinksmanship for long.

It is not clear, however, what will happen when the 90-day period is up. Nor is it clear whether any concessions were made by either side to bring the deal to pass.

The US has long-standing concerns about competition from China, pre-dating Mr Trumps’ first presidency.

It may be necessary to deal with issues around currency management and IP protection to create a more lasting calm.

Sustainable Farming Incentive (SFI)

The government has announced that applicants who started an SFI application within 2 months of 11 March 2025 but did not submit it by that date will be given 6 weeks to complete the process. NFU President Tom Bradshaw, welcomed the decision but was “disappointed by the constraints imposed which will still leave many farmers unfairly disadvantaged.”

Business confidence low

The latest Labour Market Outlook report from CIPD shows that confidence amongst UK employers has fallen.

The net employment balance (the difference between those planning to recruit and those planning redundancies) is now the lowest since the Covid pandemic.

Median pay is expected to rise by about 3% over the next 12m and some employers report continued difficulty in filling vacant roles.

IGD opinion

This data reflects a generally weak economy and growing caution amongst UK businesses. Digging into the data, we can see that retail shows an especially sharp drop in the net employment balance. 

This suggests that one reason may be increases in labour cost due to changes introduced in the Autumn budget.

These changes affect all employers, but retail is especially affected due to high numbers of part-time and entry-level roles.

GDP growth

Initial GDP estimates for Q1 2025 show that the UK economy grew by 0.7% in “real terms”, compared with the previous quarter.

“Nominal” growth (with the benefit of inflation included) was 1.7%.

Both production and services showed fair growth, although services make a bigger contribution to the overall economy

IGD opinion

This is only provisional data, based on a small set of inputs, so it should be used with caution, pending updates.

The numbers are a better than expected, although growth is shown against a weak base – performance in Q4 2024 was not good.

To provide perspective, average quarter-on quarter growth in the ten years pre-Covid was 0.5%.

One reason for good performance may be that UK manufacturers brought export orders forward in order to avoid expected US tariffs.

Tariff effects and pay changes will take effect in Q2, so it is not certain that good performance will be sustained.

Pay

ONS data shows that average weekly pay in the UK rose by 5.5% year-on-year in Q1 2025 (including bonuses).

CPI inflation over the same period was 2.8%, so “real” pay growth was positive, outpacing change in the cost of living.

IGD opinion

With weak economic performance and softer labour demand, pay growth is surprisingly strong.

However, this may be partly driven by regulation like the National Living Wage (NLW), not the market.

Pay is strongly influenced by the NLW, especially in entry-level roles.

Supporting this view, pay growth was strongest in wholesale, retail, hotels and Away From Home catering.

However, the latest change to the NLW only became law in Q2, so it would not necessarily show up in Q1 data.

It is possible that some employers implemented the higher NLW early.

Alternatively, pay increases in these sectors may be a consequence of high demand for workers.