Policy makers need to focus on forgotten driver of Britain’s jobs downturn – rising unemployment

The fall in employment over both the past 12 months and the past five years is entirely accounted for by higher unemployment, not rising economic inactivity as many people assume, and young people are bearing the brunt of Britain’s jobs downturn, according to the Resolution Foundation’s latest Labour Market Outlook published today (Monday).

Ahead of crucial, though flawed, new ONS labour market statistics tomorrow, the Foundation’s analysis – including its own labour market estimates derived from more reliable HMRC and ONS data than the Labour Force Survey – examines what’s really happening to jobs and people’s ability to find work.

The report notes that contrary to many people’s expectations, the Foundation’s estimate of labour market participation – the share of people who are either working or looking for work – stands at 79.5 per cent, above pre-pandemic levels (79.2 per cent) and close to a record high (it peaked at 79.9 per cent in 2023).

Conversely, economic inactivity – an issue that has dominated public debate in recent years – is currently slightly below pre-pandemic levels (20.5 per cent, vs 2019 average of 20.8 per cent). This is because while there has been a worrying rise health-related economic inactivity – up 1.2 percentage points since January 2020 – this been offset by falls in inactivity to due to family reasons and early retirements (down 1.0 and 0.4 percentage points respectively).

However, for all these offsetting trends, the share of people actually in work has been falling. The Foundation’s estimate of the UK’s working-age employment rate is down 1.0 percentage points since pre-pandemic (comparing October 2025 with January 2020) – equivalent to 415,0000 workers. This fall is entirely accounted for by higher unemployment (comparing August 2025 – the latest period for which we have unemployment data – with January 2020), which currently sits at five per cent.

This shows that while it is important to delve into the drivers of rising ill-health and disability across Britain, which carry huge economic consequences for individuals and wider society, policy makers cannot afford to miss the main reason for Britain’s current employment downturn – a deficit of jobs that is causing elevated unemployment.

The report adds that addressing this employment downturn is particularly important given that young people are at the heart of it – and that long periods out of work can have scarring effects on their careers.

Young people doing the worst is a typical feature of jobs downturns – they were far more likely to lose work post-financial crisis and during Covid – and this time is no different. The number of 18-24-year-olds in payrolled jobs has fallen by 1.0 percent in the 14 months to September 2025 (-36,000) for example, while the number of payrolled jobs held by 25-49-year-olds has fallen far less (down just 0.2 per cent in the same period).

The report notes that the recent rise in unemployment can be explained in part by the big increase in employer National Insurance contributions last April. However, while much of the jobs impact of that tax rise is likely to have passed through now, the outlook for unemployment remains uncertain.

Indeed, with both the OBR and the Bank of England forecasting elevated unemployment to last well into next year and beyond, the Government should redouble efforts to support young people into work. This should include slowing the pace of minimum wage rises to avoid pricing 18-20 year olds out of work, and extending job support for 21-24 year olds who are currently ineligible for the recently announced schemes.

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

“In recent years, public debate has centred around an ‘inactivity crisis’ caused by ill-health and disability. But while rising levels of health-related inactivity is a big problem, rising unemployment is the forgotten driver of Britain’s current jobs downturn.

“Young people again find themselves at the heart of this downturn, just as they were in the wake of the financial crisis and Covid. Policy makers and employers need to redouble efforts to support them.”