Skyrocketing unemployment by 200,000 under Labour, corporations attribute it to a surge in national insurance costs
In April 2025, a significant increase in employer National Insurance Contributions (NICs) was implemented as part of Rachel Reeves' national insurance policy. This change has had a profound impact on the UK's employment and hiring landscape.
According to a survey by the CIPD, 84% of UK businesses have experienced increased employment costs since the NIC changes, with the care and hospitality sectors particularly affected. These higher costs have led many employers to reduce staff rather than raise prices, contributing to a decline in permanent worker appointments and record-low company hiring intentions.
The rise in the minimum wage, coinciding with the NIC increases, has further pushed up overall payroll costs and consumer prices, worsening inflationary pressures. Economists like Ben Caswell from the National Institute of Economic and Social Research (NIESR) suggest that firms are absorbing the NIC hikes by cutting jobs instead of passing costs to consumers. However, rising minimum wages are causing prices to increase elsewhere.
The combined effect of these factors is seen as a drag on economic growth and risks damaging living standards and tax revenues. The Bank of England has attributed rising food prices partly to these Chancellor-led policies, indicating broader inflationary effects.
Despite criticism that Reeves' tax measures are impeding growth, some analysts argue that the UK's sluggish employment and investment trends also reflect a weak global economy and persistent inflation, not solely these policy changes. Growth improvements have been too limited to offset fiscal pressures caused by rising borrowing costs and broader external factors.
To address a fiscal shortfall of around £50 billion in the 2025 budget, Reeves is considering additional tax changes, including possible adjustments to pension tax reliefs and capital gains tax on high-value homes. These proposals aim to strengthen public finances but may also affect broader economic confidence and labor market dynamics.
The job losses due to these changes are particularly affecting 25-34 year olds, with a drop of 106,000 since July 2024. The unemployment rate remained unchanged at 4.7% in July 2022, despite the jobless total being 206,000 higher than the same period a year ago. Vacancies have fallen by 145,000 compared with a year ago, and the number of payrolled employees fell by 8,000 in July, marking the tenth decline in the past 12 months.
The downturn in the jobs market is widely blamed on a £25 billion national insurance hike for employers and a sharp rise in the minimum wage, among other factors. However, the pace of further interest rate cuts remains uncertain, with markets seeing the chances of one more cut this year at 3.75%, little better than 50/50.
Jane Gratton, deputy director of public policy at the British Chambers of Commerce, has stated that it's crucial that there are no more taxes on business in the forthcoming budget. Isaac Stell, investment manager at Wealth Club, has suggested that the slowdown in wage growth points to growing signs of economic strain and an absence of momentum.
In summary, Rachel Reeves' national insurance policy and associated labor market changes have contributed to a downturn in employment activity and heightened inflation risks in the UK, while fiscal challenges may prompt further policy adjustments impacting the labor market.
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