Warning of unemployment surge as business costs force companies to close
Unemployment levels in the UK reached the highest levels since Covid at the end of last year but the situation could get worse in 2026, experts have warned.
In the three months to October, Office for National Statistics (ONS) data showed unemployment rose to 5.1 per cent from 4.3 per cent the previous year; This shows that unemployment increased throughout the year.
This rate could continue to rise in 2026, with a number of businesses facing brutal cost pressures being forced to close.
Years of high interest rates, rising employment costs, high energy bills, and inflation driving up the cost of raw materials and services have all contributed to making conditions extremely challenging for companies.
This combination could “destroy” so-called zombie companies in the coming months, says one expert. Zombie companies is the term given to businesses that are struggling, unable to grow or adapt, but have not yet closed completely because they are making just enough to survive.
Although business closures are not generally seen as positive, the closure of some firms leads to other new, more innovative companies taking their place; over time, this can lead to increased productivity and improved economic conditions in the long run. But in the meantime, jobs will be lost due to closures.
Ruth Curtice, chief executive of the Resolution Foundation, said: “There are early and encouraging signs of a mild zombie apocalypse, where higher interest rates and minimum wages combine to destroy struggling firms, leaving the door open for new, more productive firms to replace them.
“But while this is good news for our medium-term economic prospects, the short-term impact could be layoffs and higher unemployment. Policymakers will need to redouble their efforts to tackle this problem.”
Two-thirds (67 percent) of economists surveyed believe unemployment will be between 5 and 5.5 percent by the end of 2026. Times the report shows.
If the unemployment rate reaches the top of that range, when it is in the midst of a decline from its 2011 peak of 8.4 percent, it would be its highest level since 2015 (5.6 percent).
Many firms have paused or canceled plans to hire new talent through late 2025 due to budget uncertainty and the cost implications of hiring Rachel Reeves.
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This follows increases in National Insurance contributions and the minimum wage earlier in the year.
Aside from overall job levels, there are a number of factors that suggest young people are at the biggest loss when it comes to finding employment.
ONS data showed unemployed 18-24 year olds rose by 85,000 in the three months to October; This is the largest increase in the last three years.
The government’s commitment to create a single employment cost for all adults, rather than the two-tier system that currently pays 18- to 20-year-olds a lower minimum wage, has also led business leaders to predict that companies will stop hiring inexperienced young people because it would not be cheaper than employing experienced workers.
