Labour market: Underneath the softening

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Labour market: Underneath the softening

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UK Viewpoint

Soft labour market, but less slack than meets the eye 08 July 2026

The UK labour market has softened, but effective slack may be lower than traditional Macro

measures indicate. Much of the increase in unemployment over the past year has been United Kingdom

driven by rising participation, rather than a big fall in employment rate. Moreover, few Sonali Punhani

sectors dominate the unemployment rise and payroll fall, with high labour costs UK Economist

explaining a large part of the weakness, rather than potentially a broad-based cyclical MLI+44 (UK)20 7996 1032

downturn. At the same time, rising labour costs, health-related inactivity and skill sonali.punhani@bofa.com

mismatches may have pushed up the NAIRU, which could imply less slack. Increased Ruben Segura-Cayuela

dispersion in sectoral unemployment could also imply lower effective slack. EuropeBofA EuropeEconomist(Madrid)

ruben.segura-cayuela@bofa.com

We don’t expect a sharp deterioration this year BofA Euro Economics

We don’t expect a sharp labour market deterioration this year. Most survey indicators of BofA+44 20Europe7995 (Madrid)1476

employment growth point to some signs of stabilization and suggest limited risk of a europeaneconomics@bofa.com

broad-based and sharp labour market deterioration from the conflict. We expect the

unemployment rate to peak at around 5.2% this year, with balanced risks.

Further wage disinflation can stall

Wage growth has slowed, but we think further wage disinflation is not guaranteed.

Sectors covering 62% of employment have wage growth above 3.5% and some of them

still face post pandemic labour shortages. Much of the wage slowdown since 2024 has

been driven by a few sectors.