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The UK government’s decisions to raise minimum wage rates and payroll taxes have fuelled a sharp rise in youth unemployment, senior Bank of England officials said on Tuesday.
Huw Pill, the BoE’s chief economist, said last year’s increase in employers’ national insurance contributions, combined with a drive to bring the youth rates of the minimum wage towards the main adult rate, “have had a particular effect on young people” aged between 16 and 21.
The effects of the policy changes were “particularly acute for that part of the labour market and I think we do see that in the data,” Pill told the parliamentary Treasury committee.
This cohort of young people was already launching their careers at a difficult time in the aftermath of the pandemic, he added, and in the face of deeper structural changes such as the adoption of AI that policymakers might find “difficult to manage”.
Although companies taking up AI did not yet say it was leading them to slash jobs, “on a forward-looking basis that remains an open question”, Pill said.
BoE rate-setters were giving evidence to the committee a week after official data showed UK unemployment among 16-to-24-year-olds had hit its highest rate for a decade, outside the pandemic period, rising to 16.1 per cent in the final quarter of 2025.
This means UK youth unemployment is now higher than the EU average — which stood at 14.9 per cent at the end of 2025 — for the first time in records going back to the turn of the millennium. Overall unemployment stands at 5.2 per cent, with separate payroll data showing job losses have been heaviest in sectors such as hospitality that often give young people their first experience of work but were hard hit by the tax and wage changes.
Alan Taylor, an external member of the BoE’s Monetary Policy Committee, also said the effect of the policy changes made in the 2024 Budget had been a “recurring theme” in his conversations with businesses over the past year.
But Andrew Bailey, the BoE governor, said that despite the rapid increase in youth unemployment it was not in the central bank’s power to bring it down.
“Monetary policy is a blunt instrument, it’s not an instrument that we could use to target that sort of thing,” he told the committee.
Bailey also drew attention to a recent sharp rise in London’s unemployment rate — which stood at 7.6 per cent, the highest of any UK region, in the final quarter of 2025.
“That is quite unusual in British history,” Bailey said.
Although the capital has often had unemployment above the UK average, its job market has worsened sharply over the past year, with a range of data sources pointing to slower hiring.
Jack Kennedy, senior economist at the job search site Indeed, said this reflected weak demand for many professional and tech sector roles, as well as a “persistent hit” to hospitality, retail and leisure stemming from the shift to hybrid working patterns.
London’s younger demographics would also mean that “an environment of weak entry-level hiring . . . is likely hitting particularly hard”, Kennedy added.
In a potential positive for the economy, Bailey said he was seeing some signs of an upturn in productivity, driven by an unwinding of labour hoarding by firms during the pandemic.
With inflation on track for the BoE’s 2 per cent target, Bailey said he saw scope for further rate reductions, even if it had been too soon for this at the MPC’s February meeting. Bailey voted to keep rates unchanged at 3.75 per cent at that meeting.
It remained a “genuinely open question” as to whether the conditions for another cut would be in place as soon as the March meeting, he added.