The number of Britons stuck in work for more than a year has risen to its highest level since 2016, with small employers warning that rising tax rates and the now-defunct Employment Rights Act are shutting out the next generation of employment.
New figures from the Office for National Statistics show that 474,000 people are now classed as long-term unemployed – meaning they have spent more than twelve months out of work. The highest figure since January 2016 and an unwelcome milestone in the labor market has, until recently, been a rare bright spot in Britain’s recovery.
The decline has been sharp. Since Labor came to power in July 2024, some 129,000 people have gone into long-term unemployment, a move that is regrettable given that Chancellor Rachel Reeves’ £26bn attack on employer National Insurance has increased wages, particularly in the SME-heavy and heavy-hitting tourism sectors in high-income countries.
Cool labor market with a long tail
For owner-managers, the headline statistics are alarming because of what economists call “scars”. The longer a candidate is out of work, the steeper the climb – diminished skills, weakened networks and despair. That in turn dampens productivity, erodes the tax base and dampens consumer spending, the very engine on which many small firms rely.
Stephen Evans, chief executive of the Learning and Work Institute, did not mince his words. “Even if some of the increases are cyclical due to the weak economy, there is a risk that if the economy improves, they will find it difficult to return to work,” he said. “Nicking long-term unemployment in the bud is very important for economic opportunities, and for those people.”
Evans focused more on the under-25s, where, he argued, even short spells of unemployment can leave a lasting dent on lifetime earnings and job prospects, a concern echoed in our previous report on how Reeves’ tax hike has halted employment across the SME economy.
Young workers are struggling
The statistics prove him. The unemployment rate for 16- to 24-year-olds has risen to 16.2%, the highest rate since January 2015, and the number of 18- to 24-year-olds who are long-term unemployed has doubled since 2016. 556,000 by the end of 2022.
Fergus Jimenez-England, an economist at the National Institute of Economic and Social Research, said that young people are burdened. “There is a risk that entrants to the labor market will be discouraged if they cannot find work quickly,” he warned, suggesting a new wave of unemployment as discouraged job seekers return to the welfare system.
The warning comes amid mounting evidence that Britain’s youth unemployment problem is worsening as AI and higher taxes take over employment, with entry-level roles among the first to be axed as employers tighten their purse strings.
SME hiring budgets are squeezed from every angle
For small businesses, the math is rarely too punishing. Employer’s National Insurance contributions have been collected, the National Living Wage has increased again, and the Employment Rights Act has piled on new compliance costs for firms that typically do not have a dedicated HR function.
Andrew Wishart, an economist at Berenberg, summed up the company’s situation bluntly. “By making companies more cautious about hiring, higher employer National Insurance, minimum wages and the tightening of worker protections in the Employment Rights Act are likely to increase the unemployment rate.”
The result is clear from the official data: job vacancies have just fallen to a five-year low and UK unemployment has risen for 12 months as job vacancies fall. Sales and hospitality – sectors that tend to absorb school leavers and second-hand workers – are shedding more than 150,000 roles in the year to April 2026, according to ONS payrolls data.
Political headache and policy dilemma
The numbers have gone awry at Westminster. Helen Whately, the shadow work and pensions secretary, accused ministers of allowing welfare to become a “long-term way of working”, arguing that the emergence of long-term employment has a huge impact “not just on the unemployed and their families, but on taxpayers”.
Pat McFadden, the Work and Pensions Secretary, pointed to the ongoing deterioration of the Iran conflict as “putting a shadow on the labor market”, while stressing that 416,000 more people are now in work compared to last year. “Increasing opportunities and tackling youth unemployment in all areas remains a priority,” he said.
For Britain’s 5.5 million small and medium-sized businesses, however, the political back-and-forth offers cold comfort. With rates being squeezed by higher wages and tax costs, and the structural unemployment rate clearly creeping up, the prospect of a meaningful rebound in hiring ahead of the next Budget looks slim.
The danger, as Evans put it, is that today’s squeeze is fueling tomorrow’s structural crisis – and that a generation of young workers ends up paying the price long after the economic downturn has ended.
