Britain’s labour market is faltering, and subsidies cannot mask the policies pricing young workers out.
In almost two decades of sclerotic economic performance for the UK economy, the one bright spot has been the performance of the labour market. While productivity and general growth have been disappointing, job creation throughout the 2010s and immediately post-pandemic was strong. Indeed it became almost a motif during the 2010s to compare UK unemployment, especially youth unemployment, with the much higher rates in many eurozone countries.
Now, sadly, even this crutch has been kicked away. The UK economy is no longer the job creating machine it was. The data shows the labour market in retreat: overall unemployment rate is now up to 5.2%, the highest rate (excluding the height of the pandemic) since 2015. Job vacancies have fallen from a peak of 1.3 million, down to around 726,000 — again, a level last seen in 2015. And total payrolled employees have decreased by 134,000 in the last year.
Most worrying of all is the picture for youth unemployment. Comparing youth unemployment pre-pandemic and now shows among those 16-17 the rate has risen from averaging just under 21% in 2019 to around 35% today. Among 18-24 year olds the equivalent figures are around 10.5% and 14%. In fact, among 15-24 year olds the UK now has a higher rate of youth unemployment than in the Eurozone (16.1% vs 15%).
In response to this the government has announced it will pay businesses to employ young benefits claimants. Businesses will be offered £3,000 of subsidy for hiring under 25s who have been on universal credit (UC) for over six months. This is yet another erosion of the price mechanism, the latest in a long line of government interventions over recent decades that have weakened the functioning and efficiency of this most crucial element of a market system — as others have previously covered.
The government is essentially artificially lowering the cost of a specific segment of labour supply to try to move demand
The government is essentially artificially lowering the cost of a specific segment of labour supply to try to move demand. The price mechanism works because of the signals it sends to the individuals and businesses that make up supply and demand. These signals lead the individuals and businesses to alter their behaviour, often totally unconscious of the root cause of the price change, in ways that promote greater economic efficiency.
But by subsidising demand for a certain segment of labour these signals are concealed. Businesses may choose to hire based simply on the cash subsidy rather than because the under 25 is the best fit for the role, which will likely reduce what economists call allocative efficiency — i.e. resources being allocated to where they can be most productively used. In this example, that would see a business hiring a 18 year old who’s been on UC for 9 months rather than a 26 year old who already has some experience just because of the £3,000 subsidy. While that outcome would be good for the 18 year old, it likely won’t be for the 26 year old — or the wider economy.
This subsidy is only necessary because of the actions and policies of governments over the last decade
This subsidy is only necessary because of the actions and policies of governments over the last decade. The last year has seen the convergence of a quadruple whammy hitting the UK labour market and especially youth employment: the rapid rise in the minimum wage, NIC tax increase, the Employment Rights Act and the increasing use of AI, especially for entry level tasks.
While imposing a national minimum wage risks significant unemployment if the rate is raised too high, the increases were modest for many years after its introduction in 1999. However in 2015 that changed, when the Low Pay Commission was given a new target of raising the minimum wage up to 60% of median wages. Having achieved this, this was then upgraded in 2020 to two thirds of median wages and again strengthened in 2024 to never falling below the two thirds level and aligning the rate across age groups. This meant the UK one of the highest minimum wages in the world, putting young people in danger of being priced out of the market compared to more experienced and productive older workers.
The minimum wage in the UK is now so high that the annual cost of hiring a full time minimum wage worker over 21 is £25,852. That’s up 15% on the cost in 2024. But this is dwarfed by the increase for younger workers, with those aged 18-20 working full time on the minimum wage, the cost to the business of employing them has risen to £19,747 in 2026 — a staggering 26% increase on the level in 2024. Of course, even if they do retain their job these employees often don’t benefit that much, as the tax system eats up about half of the increase in wages. On top of this the Employer National Insurance Contribution was raised from 13.8% to 15% in April 2025, which — combined with the rise in the minimum wage — has further jacked up the cost of employing someone, particularly if their productivity isn’t that high.
By making it harder to hire and fire employees, the Employment Rights Act has raised the cost and risk of hiring an additional employee — especially given it isn’t clear how productive young workers will be. Finally, while its overall economic impact is uncertain, AI appears to have started to bite in certain segments of the entry level jobs market. Those sectors most exposed to AI have seen significant reductions in entry level recruitment: for example, in the UK tech sector, graduate job openings have fallen off a cliff: they dropped 46% last year and are forecast to fall by a further 53% this year.
Each of these shocks hitting the labour market alone might have been absorbed, but all of them converging at roughly the same time has been a toxic combination that has left the UK labour market in a precarious position — particularly for young people. The government resorting to subsidising youth employment is just one more example of what UK governments have too often resorted to during the last few decades: trying to treat the symptoms of a problem rather than facing up to reality and tackling the root cause. In this case, that is a minimum wage that is too high especially for the young, raising a tax that hit employment directly and an Employment Rights Act that makes the labour market far too inflexible just at the moment when it needs the flexibility to respond to the rise of AI. Until ministers reverse the policies that have made hiring risky and expensive, they will remain trapped in a cycle of distorting the market to fix problems of their own making.
