LONDON, U.K.: Britain's labor market is expected to weaken further this year, with unemployment forecast to climb to its highest level in more than a decade as rising labor costs weigh on hiring, a leading economic think tank said.

The National Institute of Economic and Social Research (NIESR) said the jobless rate is likely to average 5.4 percent in 2026, up from 4.8 percent in 2025 and above the forecasts of most economists. That would mark the highest unemployment rate since 2015.

"Part of this unemployment story in the UK is rising labor costs," said NIESR economist Ben Caswell.

NIESR pointed to the cumulative impact of an increasing minimum wage and a rise in employers' social security contributions, which together pushed up the cost of hiring an entry-level worker by 10.6 percent last year.

Recent governments have raised the minimum wage to around two-thirds of median earnings, and Britain's minimum wage is due to rise by a further four percent in April, keeping it among the highest relative to average earnings among major economies. Prime Minister Keir Starmer's government has also said it wants to continue phasing out the lower minimum wage paid to workers aged 18 to 20.

"Industries which have a larger share of their workforce on the minimum wage have also experienced larger increases in their respective unemployment rates," Caswell said.

NIESR's analysis of official data also showed unemployment rising in the IT sector, which the think tank said could reflect the growing use of artificial intelligence, reducing demand for entry-level roles.

However, the think tank said the rise in unemployment was not driven solely by a lack of job openings. It noted that more people who had previously been economically inactive — not working or seeking work — have begun looking for jobs.

That trend followed several years after the COVID-19 pandemic, when inactivity rates rose sharply, keeping some people outside the official unemployment figures. As more of those individuals re-enter the labor force, the unemployment rate has risen even without a sharp decline in vacancies.

Looking further ahead, NIESR said the unemployment rate should ease back toward 5 percent by 2028 or 2029, assuming the economy avoids a recession. It described that level as close to Britain's long-term sustainable rate outside of an economic boom.

Britain's official unemployment rate was at around 3.8 percent in both 2019 and 2022, its lowest in roughly half a century. However, the survey used to calculate the figure is currently being overhauled after concerns about data quality.

Alongside its labor market outlook, NIESR slightly upgraded its economic growth forecasts. It now expects Britain's economy to grow by 1.4 percent in 2026 and 1.3 percent in 2027, up from estimates of 1.2 percent for both years made in November.

The think tank also forecast two interest rate cuts by the Bank of England this year, bringing its benchmark rate to 3.25 percent from 3.75 percent.

The central bank is due to publish updated economic forecasts this week alongside its February monetary policy decision. Economists polled by Reuters do not expect a rate cut before March at the earliest.