Jobs market cools as small businesses count the cost

Small firms hit the hiring brakes as vacancies fall

Jobs market cools as small businesses count the cost

Small firms are putting recruitment on ice. Vacancies have slipped below 700,000, and the smallest employers account for the biggest fall. Finding staff may become easier, but that is little comfort if businesses cannot afford to take them on.

Down but not Out

Photographer: Yan Kolesnyk Unsplash photo ID: 2e-Gtx74Oe8(@kolesnykyan)

Job vacancies have dropped below 700,000 for the first time in more than five years. It’s a sure sign that the labour market that is cooling. However, it’s not collapsing at 671,000 vacancies and there’s good news in that the ONS data shows unemployment has edged down 4.7% (from 4.9%). Wage growth has slowed down again too, to 3.7%.

There are a lot of figures for small and micro businesses to juggle with to understand what is happening and how it affects them. The mix of falling vacancies, weaker wage growth, and rising inflation risk creates a complicated picture. It may mean it’s easier to hire people and to hang onto good employees, because there are fewer vacancies out there for people to apply for, but that only helps if trading conditions don’t get any tougher.

Vacancies

Vacancies fell by 21,000 in the three months to September. That’s the biggest fall since the beginning of the year and the ONS says the decline is “concentrated mainly within smaller businesses”. The businesses aren’t hiring so many people because of rising labour costs, weaker demand from customers, higher energy bills and uncertainty about what 2027 is going to bring. There are still worries and forecasts that inflation will rise again given energy and fuel costs. Small firms usually hire early in a recovery and stop hiring early when business slows down.

Hiring and hold onto good people may become easier as competition for workers falls, but fewer vacancies is likely to mean that small firms are holding back on investment and expansion. Labour shortages are easing, but they’re not disappearing.

Unemployment

Unemployment dipped to 4.7%, which looks positive on the face of it, but it’s not the whole picture. Vacancies are falling faster than unemployment, meaning people are staying in work but fewer new jobs are being created. That slows down job churn and workers have less bargaining power, which is why wage growth is slowing too. People aren’t going to move jobs when vacancies are low, and they can’t be sure of better wages.

Wage Growth

Regular pay growth is now 3.7%, down from earlier peaks. This slowdown is crucial because workers have less leverage to demand higher wages and businesses face less pressure to raise pay. The Bank of England sees the risk of higher inflation moving from being driven by rising wages to being driven by energy costs.

Lower wage pressure helps small business margins and hiring people becomes more affordable. On the other hand, customers have less disposable income, and wages aren’t going up fast enough to change that, so demand for non‑essential services is weak and the cost‑of‑living squeeze persists. Weak wage growth means fragile consumer spending and a fragile economy.

Watching Closely

The Bank of England is watching closely because it’s stuck between a rock and a hard place. To raise interest rates or to hold them as they are?

A weak labour market makes the argument for leaving rates as they are because low vacancies and slow wage growth reduce the risk of inflation rising. But a potential 20% rise in energy bills next year could push inflation above 4% in early 2027 and would be disastrous for small businesses with no buffers, especially those heavily dependent on energy.

Borrowing costs may stay high. Interest rates could rise to 4% in November but that’s not guaranteed and businesses don’t want that to happen, but bringing interest rates down which businesses would love, isn’t likely to happen for a while yet.

Jobs Squeeze

Economists describe the situation as a prolonged jobs squeeze rather than an employment crisis. However, the Government is desperate to increase the number of young people in employment, so the picture isn’t particularly rosy either. Jobs exist but fewer new ones are being created because businesses are cautious and don’t want to overextend while the economy is stuck in the “slow lane”.

Stability‑without-strength

Vacancies are falling, wage growth is slowing, inflation isn’t rising yet but the risks of it doing so are rising. The labour market is cooling but not collapsing, so while hiring may get easier, caution rules, and the next six months will be about resilience, not expansion.