Unemployment to rise after overhaul of workers’ rights

By the Editorial Team · Thursday, October 29, 2026

The Office for Budget Responsibility forecasts UK unemployment will exceed 5 percent in mid-2027 due to the Employment Rights Act and rising labour costs, including higher national insurance and the national living wage. This projection signals a slower labour market recovery with reduced job vacancies and recruitment challenges, despite government efforts to enhance worker protections and increase wages.

Unemployment in the United Kingdom is projected to exceed 5 percent next year as a result of recent changes to workers’ rights and rising labour costs, according to the Office for Budget Responsibility (OBR), the government’s independent fiscal watchdog. The OBR attributed the expected rise largely to the Employment Rights Act, which it said imposes additional costs, restricts employer flexibility, and creates uncertainty, outweighing any productivity improvements from enhanced worker protections.

The Employment Rights Act, a key component of the Labour government’s agenda, introduces measures such as stronger legal safeguards against unfair dismissal, a ban on exploitative zero-hours contracts, and a statutory right for employees to request flexible working arrangements. However, the OBR cautioned that the legislation, combined with planned increases in employers’ national insurance contributions and the national living wage, would weigh heavily on the labour market.

According to the OBR’s forecasts, unemployment will peak slightly above 5 percent in the second quarter of 2027, marking a delay in the anticipated rise compared to earlier projections. Following this peak, the rate is expected to gradually decline. Despite this, the OBR noted ongoing signs of subdued labour demand, including a decline in job vacancies, slower wage growth in the private sector, and weakening recruitment survey results, even as the official unemployment rate fell from 5.2 percent at the end of 2025 to 4.9 percent in mid-2026.

In parallel with these changes, the government announced another increase in the national living wage effective from April. The minimum hourly rate for workers aged 21 and over will rise by 3.9 percent to £13.21, amounting to roughly an additional £910 annually before tax for full-time employees. Workers aged 18 to 20 will see the minimum wage increase to £11.27 per hour, a similar percentage rise, while younger workers aged 16 and 17, along with eligible apprentices, will receive £8.31 per hour.

Critics have highlighted that Labour has effectively reversed a prior manifesto commitment to equalise the minimum wage across all age groups within this parliamentary term. The minimum wage for young workers between 18 and 20 has already risen by 26 percent since 2024, drawing concern from employers who warn that such increases risk undermining efforts to integrate approximately one million young people currently not in education, employment, or training (NEETs) into the workforce.

The budget also reinstated funding for the Union Learning Fund, allocating £15 million annually from 2027 through 2028 to support trade unions in delivering programmes aimed at worker training and skill development.

While the OBR acknowledged that the economic impact of the final Employment Rights Act is expected to be less severe than earlier versions proposed in 2024, it emphasized uncertainties remain, particularly regarding the final rules on zero-hours contracts. The watchdog concluded that the cumulative effects of these employment policies and fiscal measures would pose challenges for the labour market, pushing unemployment slightly higher but moderating earlier, more pessimistic forecasts.

This article was reported by synthesizing coverage from multiple independent news outlets to present a balanced, unbiased account. Read about our editorial standards. Spotted an error? Let us know.