Overview
The National Institute of Economic and Social Research expects British unemployment to rise to its highest level since 2015, forecasting an average jobless rate of 5.4% this year. That projection marks an increase from 4.8% in 2025 and is higher than many other forecasters' estimates.
Rising labour costs and employer taxes
NIESR attributes much of the projected rise in unemployment to increasing labour costs. "Part of this unemployment story in the UK is rising labour costs," NIESR economist Ben Caswell said. The think tank points to an increasing minimum wage - which recent governments have lifted to two thirds of median earnings - and a jump in employers' social security contributions as primary drivers.
According to NIESR's calculations, those changes combined to produce a 10.6% increase in the cost of hiring an entry-level worker last year. The analysis finds that industries with a larger share of employees on the minimum wage have tended to see bigger increases in their unemployment rates as a result.
Sectoral patterns and technology
NIESR's review of official data also highlighted a rise in unemployment within the information technology sector. The institute said this increase might be a result of artificial intelligence reducing demand for entry-level roles in that field.
Policy moves and labour-market participation
Britain's minimum wage is scheduled to rise by a further 4% in April, keeping the minimum pay level high relative to average earnings among major economies. The government has signalled a desire to continue phasing out the lower minimum wage tier that applies to 18-20 year-old workers.
Not all of the increase in measured unemployment, NIESR noted, reflects a fall in vacancies. The institute found a renewed flow of people into job-seeking: more individuals who previously were neither working nor actively searching for work - and so were not counted as unemployed - are now trying to find positions after several years in which inactivity rates rose following the pandemic.
Medium-term outlook
Looking ahead, NIESR said that, barring a recession, the unemployment rate is likely to decline to about 5% in 2028 or 2029, which it described as roughly the long-term sustainable rate outside of an economic boom.
By way of historical context from official figures, Britain recorded an unemployment rate of 3.8% in both 2022 and 2019 - its lowest in around half a century - although the survey used to calculate that rate is currently being overhauled because of quality concerns.
Growth and monetary policy expectations
Alongside its labour-market projections, NIESR nudged up its forecasts for GDP growth to 1.4% in 2026 and 1.3% in 2027, from previous estimates of 1.2% for both years published in November.
The institute also anticipates two Bank of England interest rate cuts this year, which would lower the central bank's benchmark borrowing rate to 3.25% from 3.75%. The Bank of England is due to publish updated economic forecasts on Thursday alongside its February monetary policy decision. Economists polled do not expect a rate cut before March at the earliest.
Implications for stakeholders
The combination of heavier labour costs, a rising minimum wage and higher employer tax burdens appears to be reshaping the distribution of unemployment across sectors, with particularly notable effects in industries that employ larger shares of minimum-wage workers and in technology fields that face changing demand for entry-level roles. At the same time, higher measured unemployment is partly explained by more people re-entering the active labour force after a period of elevated inactivity.