Better jobs headline hides a labour market stuck in neutral

Unemployment falls but small firms keep the hiring brakes on

Unemployment is down, but don’t mistake that for a jobs boom. Employment can rise, vacancies can fall and businesses can remain nervous—all at the same time. For small firms weighing up another wage bill, the detail matters far more than the headline.

THREE THINGS CAN BE TRUE AT THE SAME TIME

The unemployment rate has fallen to 4.7 per cent, but this is happening because of how the labour market works, not because the economy has suddenly become stronger.

The latest figures from the Office for National Statistics, (20 October 2026), show a small fall in unemployment. It fell by 47,000 people. Compared with the previous quarter, 47,000 fewer people were unemployed. That’s not a dramatic change, but it’s enough to move the dial.

This is a sign that the labour market is cooling down rather than speeding up. Vacancies are falling, wage growth is slowing, and yet unemployment has also fallen. The explanation is in the detail.

One reason is that fewer people are actively looking for work. The ONS reports that the number of people who are classed as ‘economically inactive’ has dropped to 20.9 per cent. This means more people have moved out of inactivity and into either employment or job seeking. When people re‑enter work or start looking for jobs again, the unemployment rate can fall even if the overall economy is not improving. Even small changes in inactivity can push the unemployment rate down.

Photo by Vitaly Gariev on Unsplash

Employment Up

The employment rate increased to 75.3 per cent, which is a small rise. This means more people are in work, even though hiring is slowing. Small increases in employment can reduce unemployment even when the number of job vacancies is falling.

To understand all of this, it helps to know how unemployment is defined.

Unemployment

Unemployment in the UK is measured very precisely. Only a specific group of people count as unemployed in the official figures. The ONS uses the definition set by the International Labour Organisation, which is used around the world.

A person is counted as unemployed if they don’t have a job, have actively looked for work in the last four weeks, and are available to start work within the next two weeks. A person is also counted as unemployed if they have a job starting within the next two weeks but are not currently working. This definition applies to everyone aged sixteen and over.

People who meet these criteria are unemployed. This includes someone who has lost their job and is applying for new roles, someone who works less than one hour a week and is actively seeking full‑time work, someone who has accepted a job offer but has not started yet, and someone who is available to start work immediately and is actively job hunting.

However, many people without jobs are not counted as unemployed. They are classed as economically inactive instead. This includes students in full‑time education who are not seeking work, retired people including those over sixty‑five who are claiming a pension, people who are long‑term sick or disabled and not looking for work, parents or carers who are looking after family and not job hunting, and anyone who has not looked for work in the last four weeks or is not available to start work within two weeks. These people are not included in the unemployment figures.

Employed

It also matters who is counted as employed. A person is counted as employed if they did at least one hour of paid work in the reference week, were temporarily away from a job because of holiday, sickness or maternity leave, did unpaid work for a family business, or were on a government‑supported training scheme.

Even one hour of paid work, or working unpaid in the family business, means someone is not unemployed. This can make the unemployment figures look lower than people might expect. Many people who only worked one hour in a week might not describe themselves as employed in everyday life.

Flat

The ONS describes the labour market as flat rather than booming. There are small increases in employment, small falls in unemployment and inactivity, falling vacancies and slowing wage growth. This stability, even with weaker hiring, helps keep unemployment from rising.

There have been fewer job losses than expected. Redundancies have increased, but not sharply enough to push unemployment up. This suggests businesses are being cautious but are not cutting staff heavily.

Workers also have less bargaining power. With fewer vacancies and slower wage growth, workers are less likely to demand higher pay or to move jobs for better wages. This reduces job turnover and keeps unemployment lower. Wage growth is now 3.7 per cent, down from earlier peaks.

The fall may not last.

Economists warn that the labour market is in a jobs squeeze rather than a recovery. Vacancies are falling, especially among small businesses that cannot afford to hire more people, and the number of employees on payroll has been declining. This means unemployment could rise later if hiring continues to weaken.

The unemployment rate fell to 4.7 per cent because inactivity fell, employment rose slightly, fewer people were unemployed, and redundancies did not spike. Job switching slowed as wage growth cooled.

This is not a sign of a strong labour market. It is a sign of a flat, cautious labour market with low momentum, where hiring is slowing but job losses are still contained. It’s also a set of statistics that doesn’t tell us about the quality of the jobs people are in, or whether people would prefer full‑time work instead of part‑time or vice versa.

Small businesses are pulling back on recruitment, and economists warn the UK is stuck in the slow lane. The fall in unemployment is real but fragile, and the picture may not be as positive as the headline figures suggest.