Unemployment in London is rising significantly faster than the rest of the UK as levels hit a 12-year high in January, according to figures taken from the London Datastore.
The capital hit 7.9% unemployment in January – the highest its been since February 2014 – and more than 1.5 times that of the UK average – the largest divergence since 2009.
Unemployment in London has above 7% every month between November and March, last seen across 2020 and 2021 during the Covid-19 pandemic.
While unemployment rates for the UK overall have crept up, London began to significantly diverge from the rest of the UK around July 2024, a gap that has increasingly widened since.
But why is this happening?
AI exposure
AI is heavily associated with strains in the labour market within service economies like the UK.
London’s concentration of professional services – such as finance, banking, and consulting – as well as tech companies, leaves its labour market disproportionately exposed.
A recent report by City Hall stated: “London is the UK’s most highly exposed region to GenAI, with 46% of workers meaningfully exposed, compared with 38% nationally.”
While it is difficult to measure the effects AI has already had on London’s labour market, some of the most exposed industries appear to have seen the biggest drops in hiring recently.
For example, the City Hall report identified the two most exposed sectors as information and communications and financial and insurance.
These two had the biggest decreases in graduate-level roles in June 2026 compared with the same month in June 2019, according to a recent article in the Financial Times, citing data from job search site Indeed.
Redundancy figures from the Office for National Statistics also support this as jobs in information and communications and had the second-highest year-on-year increase in redundancy rates for January-March 2026 at approximately 69%, after accommodation and food services (183%).
This job category – which is also concentrated largely in London – also consistently had the highest redundancy rates for every three-month period since July 2025.
However, Dame Diane Coyle Bennett, Professor of Public Policy at the University of Cambridge, who studies the economic effects of new technology, doesn’t think AI is significantly contributed to the labour market’s troubles.
She said: “AI use is not massively widespread, even in the kinds of sectors that dominate in London, like financial services and professional services.
“Obviously, companies are trying it out, but are not yet using it very extensively, and there are lots of reasons for that.
“Partly, you’ve got to change your workflows and do business process re-engineering, which is costly and time consuming. You’ve got to get your data in the right shape. You’ve got to do the systems integration that’s required. People are concerned about how much the cost of using models is going up.”
Government policy
Government policy – such as increase in employer’s National Insurance contributions, minimum wage hikes, and scrapping the 40% discount on business rates – could also be having a particular effect on London.
Shimeon Lee, Policy Analyst at the TaxPayers Alliance, says that London is particularly sensitive to tax changes, because of its position as one of the UK’s few net contributors to the public finances.
“Policies like the increase in employers’ National Insurance, the rise in the minimum wage and the employment rights bill, have raised the cost and risk of hiring,” he said.
“It really affects labour-intensive sectors such as hospitality and retail which make up a huge hunk of London’s economy. Hiring a full time worker on the national living wage cost 7.1% more in 2025-26, with a part time worker costing 10.6% more, and these figures being even more dramatic for under-21s.”
Some research points suggest the hospitality and retails are under particular strain.
A recent report from consumer-intelligence firm NIQ stated there were an average of 3.4 net closures per day of hospitality premises between December and March.
Meanwhile, research from consulting firm KPMG and the Recruitment and Employment Foundation found that April had the biggest drop in permanent staff recruitment for 10 months, with retail seeing the sharpest decrease.
Shimeon added: “At the other end of the labour market, the concentration of high earners in the capital combined with the extension of frozen tax thresholds, means that more people are being drawn into paying higher and additional rate tax in London, squeezing employment from both ends.
“In addition, increases in Capital Gains tax have made it less attractive to invest in companies, so they can’t expand as easily.
“Meanwhile, increases to inheritance tax and stamp duty which disproportionately affect Londoners because of higher property values cut into people’s spending power and their ability to invest.”
A spokesperson from His Majesty’s Treasury said: “Cutting wages for the lowest paid during a time of global uncertainty is not the answer.
“Increasing the National Minimum Wage boosts pay for over 200,000 young workers, and employer NICs are lower when hiring under‑21s.
“We have the right economic plan to stabilise the economy and deliver support for families and businesses.
“Our £2.5 billion youth employment support package will deliver a million opportunities across the country, ensuring every young person has the chance to earn or learn.”
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