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The cost of hiring graduates and other young workers in entry-level positions has risen by seven per cent in real terms following Chancellor Rachel Reeves’ decisions to increase employers’ national insurance contributions and raise the national living wage, according to a new analysis.
Economic Forecasts Questioned
The findings, released by the National Institute of Economic and Social Research (Niesr) on Tuesday, February 3rd, 2026, raise questions about the Labour government’s growth plans and the stability of public finances, graduate recruitment, and immigration policies. The analysis revealed that the changes to national insurance contributions – lowering the salary threshold while simultaneously increasing the tax rate to 15 per cent – contributed to the seven per cent increase in hiring costs between 2024 and 2025.
Did You Know? The tax increases implemented by Chancellor Reeves are projected to add approximately £25bn to government revenue annually.
Economists at Niesr warned that the combined effect of higher national insurance contributions and the increased national living wage is “dampening labour market dynamism.” Researchers found that firms are becoming more hesitant to expand their payrolls and are less willing to take risks on new hires, leading to a decline in job transitions and potentially slower productivity growth.
Impact on Younger Workers
Niesr director Stephen Millard noted that younger workers are being particularly affected by these trends, stating, “We do feel the labour market is particularly difficult for entry level workers.” Official statistics show the unemployment rate has risen from four per cent to 5.1 per cent over the past 18 months, alongside a rapid decline in job vacancies.
Graduates Hit in Labour Market Woes
The Niesr analysis indicates that workers in the retail, IT, and catering sectors have been most impacted by the increased labour costs. The think tank also cautioned that the increasing adoption of artificial intelligence could further pressure unemployment rates in the long term, though current data does not yet reflect widespread job displacement due to AI.
Growth Forecasts Downgraded
Niesr is currently forecasting economic growth of 1.4 per cent for the current year, a slight downward revision from previous estimates. Growth is expected to slow further to 1.3 per cent in 2027 and 1.1 per cent in 2028. The analysis also highlighted potential risks to public finances should net migration decline significantly, potentially shrinking the UK economy by 3.6 per cent by 2040 and widening the budget deficit by 0.8 per cent of GDP.
Expert Insight: The Niesr’s findings underscore the complex trade-offs inherent in government economic policy. While intended to bolster public revenue and support living wages, these measures appear to be creating headwinds for businesses seeking to hire and invest in early-career talent.
Looking Ahead
The Niesr analysis did not fully account for the potential impact of the Employment Rights Act on the labour market, but economists suggest it could further increase the burden on employers. Should migration patterns shift as predicted, the UK could face significant economic challenges. Unemployment is projected to peak at 5.4 per cent this year before gradually declining. However, the long-term effects of these economic shifts remain uncertain.
Frequently Asked Questions
What caused the increase in hiring costs?
The increase in hiring costs is attributed to Chancellor Rachel Reeves’ decision to hike employers’ national insurance contributions and raise the national living wage, according to the Niesr analysis.
Which sectors are most affected by the higher labour costs?
Workers in the retail, IT, and catering sectors have been most affected by the increased labour costs, according to Niesr economists.
What is Niesr’s forecast for economic growth?
Niesr forecasts economic growth of 1.4 per cent this year, slowing to 1.3 per cent in 2027 and 1.1 per cent in 2028.
How might these economic changes affect the job market for recent graduates in the coming years?
