Think tank links higher joblessness to rising labour costs and tax changes
British unemployment is expected to climb this year to its highest level since 2015, according to new projections from a leading economic think tank, which links the rise in part to higher minimum wages and increased employer taxes.
The National Institute of Economic and Social Research (NIESR) has forecast that the unemployment rate will average 5.4% in 2026, compared with 4.8% in 2025, placing it above most other major forecasters’ projections.
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The outlook will be closely watched by mortgage professionals assessing labour market risks and potential pressure on household incomes. When unemployment rises, consumer spending weakens and economic growth slows, which often leads central banks to cut base rates to stimulate activity; this can pull swap rates and, in turn, mortgage pricing lower. At the same time, more borrowers face income shocks, arrears risk increases, and lenders may respond by tightening criteria, repricing higher-risk segments or favouring lower loan-to-value business.
“Part of this unemployment story in the UK is rising labour costs,” said Ben Caswell (pictured right), economist at the National Institute of Economic and Social Research.
NIESR’s analysis highlights the effect of policy-driven increases in wage floors and employer contributions. Recent governments have pushed the national minimum wage up to two-thirds of median pay, while there was also a rise last year in employers’ social security contributions. Taken together, these changes produced a 10.6% increase in the cost of hiring an entry-level worker in 2025, NIESR said.
The institute noted that sectors with a greater proportion of staff paid at or close to the minimum wage have tended to see sharper increases in unemployment than the labour market as a whole.
“Industries which have a larger share of their workforce on the minimum wage have also experienced larger increases in their respective unemployment rates,” Caswell noted.
The research also pointed to a shift in white-collar employment. Using official data, NIESR reported a rise in unemployment in the IT sector, suggesting that the growing use of artificial intelligence may be suppressing demand for junior roles and entry-level positions.
Britain’s minimum wage is due to rise again by 4% in April, keeping it among the highest in advanced economies when measured against average earnings. The government of Prime Minister Keir Starmer has also signalled that it intends to continue phasing out the lower wage band for 18- to 20-year-olds, further narrowing pay differentials across age groups.
However, NIESR concluded that the increase in unemployment is not driven solely by weaker hiring. The institute found that more people who had previously been economically inactive – neither in work nor seeking work – have started to look for jobs, reversing part of the post-pandemic rise in inactivity. As these individuals re-enter the labour force and begin actively searching, they are counted as unemployed, adding to the headline rate even if vacancies have not fallen sharply.
Looking further ahead, NIESR expects joblessness to ease gradually, provided the UK avoids a recession. On its central forecast, the unemployment rate could decline to around 5% by 2028 or 2029, which the think tank sees as close to the economy’s sustainable long-run rate outside periods of strong boom.
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