If you want a measure of the UK economy’s health, forget GDP figures. Look at the high street. Look at Next. The retailer’s latest warning of a “dramatic” decline in entry-level jobs is not a blip. It is a structural shift, and the market is pricing it in.
Next’s CEO, Simon Wolfson, has never been one for sugar-coating. He said the number of roles for school leavers and young workers has collapsed, driven by rising employer National Insurance contributions and the national living wage. This is a classic case of unintended consequences. Government policy, however well intentioned, is distorting the labour market. The result? Firms hiring fewer juniors, investing in automation instead, and raising the bar for experience.
Let’s look at the bottom line. Since the pandemic, the UK’s labour force participation rate among 16-24 year olds has fallen. The ONS data shows a drop of nearly 2 percentage points. That might sound small, but in a workforce of 33 million, it means hundreds of thousands of young people are falling out of the system. Next, a bellwether for consumer spending and employment, is now sounding the alarm. When the captain of a flagship retailer signals icebergs ahead, prudent investors adjust their portfolios.
From a fiscal perspective, this is a disaster. Fewer entry-level jobs means lower tax receipts from the next generation. It also means higher welfare costs. The Treasury’s own forecasts show that the ratio of working-age population to dependents is worsening. The Chancellor’s Autumn Budget, which raised employer NICs to 15%, was meant to shore up public finances. Instead, it is accelerating the shift towards capital-intensive business models. Machines don’t pay taxes. People do.
Now, look at the gilt market. The 10-year yield has been volatile, but the structural story is clear. The UK’s potential growth rate is declining. The Bank of England’s Monetary Policy Committee is caught between a rock and a hard place. Inflation is sticky, but the labour market is softening. If entry-level jobs vanish, wage growth for the low-skilled will stagnate. That feeds into lower consumption, which hits corporate profits. The FTSE 250, full of domestic earners, will feel the pinch.
There is also a capital flight risk. If UK labour becomes too expensive relative to productivity, firms will relocate. I’ve seen it before in manufacturing. Now it’s happening in retail and logistics. Next is investing in warehouse automation. Amazon is doing the same. The people who suffer are the 18-year-olds who can’t get a foot in the door. This is not a cyclical dip. It’s a permanent change in the UK’s employment landscape.
What can be done? The government could reverse the NICs hike, but that seems unlikely given fiscal constraints. A more radical option is to subsidise training for young workers, but that risks adding to the deficit. The market’s view is clear: UK labour is overpriced. Next’s warning is a canary in the coal mine. Investors should watch the unemployment rate for under-25s. If it ticks up, expect consumer discretionary stocks to underperform.
In my 20 years in the City, I’ve learned that when a company like Next issues a warning, you don’t ignore it. The structural shift is real. The bottom line is this: the UK economy is becoming less inclusive for young workers. That is bad for growth, bad for fiscal stability, and bad for the pound. The market will adjust, but the cost will be borne by those who can least afford it.
