Labour market had surprisingly sprightly start to the year, but outlook clouded by war in Middle East 

A surprise fall in the single-month unemployment rate in January – down to 4.9 from 5.3 per cent in December – coupled with a third consecutive monthly rise in the number of payrolled jobs in February – offers a more positive view of the labour market ahead of the outbreak of the conflict in the Middle East, the Resolution Foundation said today (Thursday).

The unemployment fall in January has left the three-month rate unchanged at 5.2 per cent. Meanwhile, the number of payrolled jobs in the economy is estimated to have increased by 31,900 over the past three months, including a 20,200 increase in February, although this latest data point is a ‘flash’ estimate and will be revised.

The Foundation’s working-age employment estimate, which uses this payroll data alongside population data, rather than unreliable LFS estimates, has increased slightly to 75.6 per cent for February, after having fallen for most of the previous three years.

Unemployment remains worryingly high for young people, though, and in fact in the latest data rose for all age groups under the age of 35 (while falling for age groups over 35).

The unemployment rate among 18-24 year olds climbed to 14.5 per cent and the share of 18-24 year olds out of work and not in full-time education – a close proxy to the headline ‘NEET’ rate – rose slightly to 19.2 per cent, the highest rate since 2014.

Wages continued to grow faster than prices at the start of the year – rising by 0.4 per cent in real terms. But the war in the Middle East could mean inflation is closer to 3 per cent by the summer, rather than falling to 2 per cent as previously expected, meaning prospects for another year of decent wage growth have dimmed. The question then will be how workers respond during the next round of pay settlements.

Nye Cominetti, Principal Economist at the Resolution Foundation, said:

“The labour market performed badly last year as unemployment rose to over five per cent. And while many fear more the same in 2026, the jobs market has had a surprisingly sprightly start to the year with the number of jobs up for a third month in a row.

“Young people aren’t sharing any of this good news though, with youth unemployment reaching its highest rate in a decade. One-in-six young people who are looking for a job can’t find one.

“This sprightly start to the year however comes before the war in the Middle East, which is likely to choke growth and raise prices. As a result, the chances of a recovery in people’s job prospects and pay packets are receding fast.”