Labour market calm or storm? UK payroll falls but inflation-linked wages persist (1 Oct 2025)

The UK labour market sent mixed signals on 1 October 2025. New payroll data showed a decline in employment, raising fears of a cooling job market. Yet, wages tied to inflation continue to rise, offering workers some protection against higher living costs. This creates a puzzle: are we heading into a slowdown, or are wages keeping the economy afloat?

We know that payroll numbers matter. Fewer people on company books can mean weaker demand and lower hiring confidence. But wage growth tells another story. Strong pay deals, many linked to inflation clauses, suggest that workers still have bargaining power. That is unusual in a slowing economy.

Businesses now face a tight squeeze. Rising wage bills clash with falling productivity and slower sales. The Bank of England, too, must decide how to react. Should it keep interest rates high to fight inflation, or lower them to support jobs? This mix of calm and storm makes the UK labour market one of the most-watched indicators this autumn.

Current Labour Market Snapshot

Payrolled employees in the UK slipped over the past year. Estimates show a fall of about 142,000 payrolled workers between July 2024 and July 2025. Month-on-month changes are small, but the year-on-year drop is notable. The ONS also reports small quarterly declines when comparing May-July 2025 with previous periods. Job losses are not spread evenly. Some regions and sectors feel the pain more than others. The latest PAYE real-time data pointed to a small fall in August 2025 as well. These numbers suggest cooling after a long run of tight labour conditions

Wages Vs. Inflation: Who is Winning?

Average pay continues to rise in nominal terms. The ONS puts annual regular pay growth at about 4.8% for May-July 2025. That is down from earlier in the year but still strong. When adjusted for consumer inflation (CPIH), real pay growth is positive but modest. Inflation itself edged near 4% in recent months. Many pay deals include clauses tied to inflation. Those deals help protect household incomes. But high wage growth also keeps inflation pressures alive. The result is a tough balance.

Business Perspective

Firms face a squeeze. Wage bills have risen. At the same time, demand is softer in several industries. Surveys show business confidence fell to a record low in late September 2025. Companies cite higher employment costs and energy bills. Some employers respond with hiring slowdowns or tighter recruitment. Others look to automation or outsourcing to cut costs. Investment plans are being reviewed. 

Analysts using an AI stock research analysis tool have flagged higher labour cost risks for certain stocks, especially in retail and hospitality. This combination of factors is pushing firms to be cautious about new hires.

Consumer Confidence and Spending

Households feel mixed signals. Strong nominal pay helps wallets. But rising food and energy costs still bite. Retail sales show pockets of resilience, yet overall spending growth is weak. Job fears and tighter budgets make many consumers cautious. Credit card use has ticked up in some reports, while big-ticket purchases like cars and homes face more scrutiny. If payroll declines accelerate, consumer spending could slow further. For now, wage gains are acting as a buffer.

Policy Response and the Monetary Tug-of-War

The Bank of England faces a hard choice. Some policymakers warn that wage growth may become persistent. Others caution that keeping rates high for too long risks job losses and weaker output. In late September 2025, policymakers expressed both concerns. The Bank held the Bank Rate at 4% in September while noting uncertainty on wage pass-through to inflation. That stance leaves room for either further rate cuts or a hold, depending on incoming data. For ministers, the task is also political. There is debate about fiscal support and how to shield low-income households without fanning inflation.

Risks on the Horizon

Several threats could turn calm into a storm. A deeper fall in payrolls could feed higher unemployment. Persistent wage inflation could force the Bank to delay rate cuts. Global shocks such as commodity price jumps or weaker trade would add pressure. Firms that face both falling demand and rising labour costs may cut jobs faster. On the other hand, a steady slowdown that keeps wages positive but eases price growth is still possible. That would be a gentler landing than a full blow to jobs.

Opportunities and Silver Linings

All is not doom and gloom. High-skill sectors still show strength. Tech, green energy, and some health services keep hiring specialist staff. Training and reskilling programs are expanding. Some firms shift roles to remote or hybrid models and tap wider talent pools. Wage resilience helps domestic demand in key areas. If policymakers and businesses support retraining, workers can move into stronger roles. That would ease the adjustment and lift productivity over time.

Final Words and Takeaway

The labour market now looks mixed. Payrolls have fallen, but pay gains persist. That creates friction for firms, households, and policymakers. The path ahead depends on whether wage growth cools and how fast payroll declines proceed. Close watching of ONS releases and Bank of England signals will be essential in the coming weeks. Accurate data on vacancies, pay settlements, and consumer behaviour will determine whether the current calm slips into a real storm.

Frequently Asked Questions (FAQs)

Why are UK payroll jobs falling in 2025?

On 1 October 2025, ONS data showed payroll jobs had dropped. Firms cut costs due to slower demand and high bills, even as wages continue to rise.

Are UK wages really keeping up with inflation?

Regular pay grew 4.8% between May and July 2025. After inflation, real pay rose only slightly. Workers gain some relief, but living costs still limit real benefits.

Will the Bank of England cut rates if jobs decline?

On 30 September 2025, the Bank held rates at 4%. Future cuts depend on inflation cooling and job losses declining. Decisions remain data-driven and uncertain.