New analysis suggests inactivity is rising and unemployment has not yet peaked 26 August 2025 Despite recent challenges with the official Labour Force Survey (LFS), the recent rise in the unemployment rate (0.6 percentage points since January 2024, or equivalent to 258,000 people) appears to be accurate, and there may be further labour market loosening to come, according to new analysis from the Resolution Foundation today (Friday). The Labour Market Outlook Q3 2025 from the Foundation assesses various measures of slack in the labour market to determine whether the official unemployment rate of 4.7 per cent is being impacted by the same data issues which have eroded the reliability of the official employment rate. The Foundation has constructed an alternative unemployment rate estimated on a range of labour market data which aligns closely with the official unemployment rate – both the official rate and the Foundation’s estimates rose from 4.4 per cent in April 2024 to 4.7 per cent in April 2025. While these alternative estimates point towards the reliability of the official figure, they are also able to make use of more recent labour market data (such as payroll jobs, vacancies, and wage growth) to create a ‘nowcast’ of the official rate. According to these estimates, the unemployment rate has continued to rise in the latest months and has not yet peaked. The Foundation estimates that the unemployment rate rose by 0.2 percentage points from the three months to June to reach 5.0 per cent in the three months to August. The ONS’s estimate for this period won’t be published until October. The new research also examines a range of economic indicators to assess the level of slack in the labour market – the number of people available to work more relative to the number of jobs available – and finds that the labour market is looser than it was in 2019 on the eve of the pandemic, and continuing to loosen further. Of the twelve indicators assessed – including hiring conditions, the vacancy rate and employment growth – all but three point to the labour market having more slack than it did six years ago. The Foundation further notes that the LFS has proved inaccurate at estimating both employment and economic inactivity. Using the LFS’s estimate of unemployment and its own measure of employment based on tax data, the Foundation is able to estimate the economic inactivity rate. This suggests that the ONS’s Labour Force Survey is currently correct about the level of economic inactivity but wrong about the trend – the Foundation’s estimates suggest economic inactivity has in fact risen by 1 percentage point (to reach 21 per cent) over the past two years – despite the official data suggesting it fell by 2 percentage points over that time. While this does not change our understanding of the level of inactivity, the authors warn that it remains a reversal of fortunes to be on an upward rather than a downward trajectory, as previously understood. These various indicators point towards a labour market that is in suspended animation – while employers seem to be mostly holding off on firing, they’re doing the same for hiring. This might be good news for those currently in work, especially as real wage growth persists for now, but points towards a challenging time for those looking for work and especially those entering the labour market for the first time. While signs of a slackening labour market might improve the medium-term outlook for inflation – in welcome news to mortgagors set to come off their fixed rates – any increases in unemployment will be sharply felt by the minority of affected households. Gregory Thwaites, Research Director at the Resolution Foundation, said: “Our alternative unemployment rate – based on a wide range of labour market data – indicates that unemployment has not yet peaked. “While our analysis confirms that official measures of unemployment are accurate, it worryingly indicates that economic inactivity has been on an upward trajectory for the past two years, contradicting earlier analysis. “The ongoing loosening of the labour market appears to be taking the form of a hiring freeze rather than a firing spree, but this is still bad news for job-seekers as vacancies look set to continue being scarce.”
