The UK labour market is entering a difficult period.
Businesses continue to report pressure from employment costs, while unemployment and youth unemployment remain concerns.
The latest figures show unemployment at 4.9% in the three months to July 2026, according to data highlighted by the British Chambers of Commerce. At the same time, the BCC has warned that youth unemployment is rising and could reach 16.6% according to its latest forecast.
For employers, this creates an unusual combination.
There are people looking for work, yet businesses are still finding it difficult to manage the cost of employing them.
Why the labour market matters to every business
Staff costs are one of the largest expenses for many organisations.
This is particularly true for businesses that rely heavily on people rather than machinery or technology.
Examples include:
- Professional services
- Retail
- Hospitality
- Care
- Construction
- Transport
- Administration
When employment costs increase, businesses face several choices.
They can absorb the additional cost, increase prices, improve productivity, reduce staffing or invest in technology.
None of these decisions is straightforward.
Labour costs remain a major business concern
The latest ONS Business Insights data found that cost of labour was the most commonly reported challenge among businesses with 10 or more employees, cited by 37% of respondents.
The BCC has also highlighted the pressure facing employers.
Its September assessment linked continuing labour-market weakness with high employment costs and called for measures to make it easier for businesses to recruit younger workers.
These are business-group recommendations rather than Government policy, but they demonstrate the scale of concern.
Youth employment is becoming a bigger issue
Youth unemployment is particularly important because getting people into work early can have long-term consequences.
Young people who struggle to find their first job may miss opportunities to develop:
- Experience
- Technical skills
- Workplace confidence
- Professional networks
At the same time, businesses can benefit from recruiting younger employees and developing their skills.
The challenge is making entry-level employment economically viable.
Apprenticeships could play a bigger role
For businesses struggling with recruitment, apprenticeships can provide an alternative to simply competing for experienced employees.
An apprenticeship allows a business to develop someone with the specific skills it needs.
This can be particularly valuable where experienced workers are difficult or expensive to recruit.
Businesses should consider whether they could use apprenticeships in areas such as:
- Administration
- IT
- Finance
- Customer service
- Engineering
- Digital marketing
- Management
The investment is not simply about filling a vacancy.
It is about developing future capability.
Technology is changing the workforce
Technology is another part of the equation.
The BCC has suggested that high employment costs could encourage businesses to increase their use of AI and other technology.
However, businesses should avoid treating technology and employees as mutually exclusive.
The most effective approach may be to combine the two.
For example, software could automate repetitive administrative work while employees concentrate on customer relationships, problem-solving and higher-value activities.
This can increase productivity without simply reducing headcount.
Productivity is becoming more important
When employment costs increase, productivity becomes increasingly important.
Businesses should ask:
How much value does each employee generate?
That does not mean reducing employees to a financial calculation.
It means identifying unnecessary processes that consume employee time.
For example:
- Searching for documents
- Re-entering data
- Manually producing reports
- Chasing approvals
- Repeating customer information
These activities may be necessary, but they can often be streamlined.
Recruitment is not just about salary
Businesses also need to think about what attracts and retains employees.
Salary remains important, but employees may also value:
- Flexible working
- Training
- Career progression
- Workplace culture
- Technology
- Job security
Smaller businesses may not always be able to compete with larger employers on salary.
They can, however, compete on development opportunities, responsibility and workplace culture.
Preparing for the final quarter
Businesses should review their workforce requirements before entering 2027.
Questions to consider include:
- Which roles will we need?
- Which skills are missing?
- Can existing employees be trained?
- Could technology remove repetitive work?
- Would an apprentice help?
- What will each new employee actually cost?
- Can we afford the recruitment plan?
Workforce planning should be connected to the overall business plan rather than handled separately.
The employment challenge is also a growth challenge
The UK Government has repeatedly identified business growth as an economic priority.
But businesses cannot grow without people, skills and investment.
If employment costs continue to rise while confidence remains weak, businesses may delay recruitment.
That can make it harder for companies to expand.
At the same time, rising youth unemployment represents a pool of potential workers whose skills could be developed.
This creates an opportunity for businesses willing to invest in training.
A more strategic approach to people
The labour market of 2026 requires businesses to think differently about recruitment.
The question is no longer simply:
“Who can we hire?”
It is:
“What skills will our business need, and how can we develop them cost-effectively?”
That could mean a combination of recruitment, apprenticeships, training, technology and better processes.
Businesses that take this strategic approach will be better positioned to manage employment costs while building the capabilities they need for future growth.
As the Autumn Budget approaches, employment costs will remain an important issue for employers.
But whatever measures are announced, businesses should continue focusing on the things they can control: workforce planning, productivity, training and making sure their people have the tools they need to do their jobs effectively.