Is the UK making employment too expensive?

The UK economy has a growth problem.

Productivity has stagnated for more than a decade, business investment remains subdued, and many sectors particularly construction, property, retail, hospitality and professional services are becoming increasingly cautious about hiring.

At the same time, employers are facing rising costs from multiple directions:

• higher employer national insurance contributions;
• increases to the national minimum wage;
• pension obligations;
• expanding employment rights; and
• growing compliance and HR requirements. 

Individually, each policy may appear reasonable and well-intentioned. Together, however, they may be creating a structural disincentive to employ people.

The unintended consequence is that businesses increasingly look towards automation, AI, outsourcing and subcontracting instead of expanding permanent headcount.

The rising cost of employing people

For many SMEs, employing someone is no longer simply about paying a salary.

A £40,000 employee can realistically cost a business £50,000–£55,000 once employer NICs, pension contributions, holiday pay, insurance, training and administrative overheads are included.

That fundamentally changes hiring decisions.

Businesses become more cautious:

• delaying recruitment;
• reducing graduate and junior hiring;
• relying on contractors; or
• demanding higher productivity from fewer staff. 

This risk aversion is especially visible in labour-intensive sectors such as construction, retail and professional consultancy.

Recent comments from Lord Wolfson, CEO of Next, highlighted growing concerns around the impact of rising employment costs. Speaking to the BBC, he warned of a “dramatic fall” in entry-level opportunities and argued that increasing labour costs and employment reforms were discouraging hiring decisions.

Whether one agrees entirely with his conclusions or not, the broader concern is difficult to ignore: when employing people becomes materially more expensive and legally complex, businesses naturally become more selective about who they hire.

Employment rights versus employment confidence

The UK government’s Employment Rights reforms are designed to improve fairness, security and worker protections.

Measures around predictable hours, expanded protections and restrictions on exploitative practices are politically and socially understandable.

However, businesses often assess policy changes through a different lens: risk.

If employing staff becomes more administratively burdensome, or removing underperforming employees becomes more difficult, employers naturally become more cautious before hiring in the first place.

That caution disproportionately impacts:

• younger workers;
• graduates;
• apprentices;
• trainees; and
• career changers.

Ironically, the people employment reforms are designed to protect can sometimes become the hardest to employ.

This is not purely theoretical. Across multiple sectors, employers are increasingly reducing entry-level recruitment and expecting candidates to arrive with more experience from day one.

The problem is obvious: if fewer businesses are willing to to train people, where does the next generation of skilled professionals come from?

The hidden long-term problem: future skills shortages

The bigger concern is what happens five to fifteen years from now.

When businesses reduce graduate hiring, apprentice intake and junior recruitment, the immediate savings may protect short-term profitability but it quietly weakens the long-term talent pipeline.

As recruiters operating within the UK property and construction sector, we are already seeing the consequences of this dynamic. The industry continues to suffer from severe shortages across professionally qualified disciplines such as:

• Building Surveying;
• Quantity Surveying;
• Project Management;
• CDM and Principal Design; and
• wider technical construction talent.

In many respects, the market is still trying to recover from the damage caused by the 2008 financial crash, when graduate recruitment and trainee intake collapsed across much of the built environment sector. Covid then created a second wave of disruption including delayed training, reduced mentorship, fewer apprenticeships and experienced professionals leaving the market altogether.

The concern now is that rising employment costs and growing hiring risk could create a third structural shock to the talent pipeline. If businesses continue to reduce junior hiring because employing people becomes too expensive or operationally risky, the UK may face an even greater shortage of qualified professionals over the next decade.

Construction, surveying and project delivery are not professions that can be replaced overnight with AI or automation. If fewer people enter those pathways today, the industry inevitably faces a much smaller pool of qualified professionals tomorrow.

Why AI changes the equation

The conversation becomes even more significant when combined with rapid advances in AI and automation.

Historically, businesses employed people because humans were the only scalable solution for many operational tasks. That assumption is changing rapidly.

AI can now:

• screen CVs;
• automate administrative tasks;
• manage scheduling;
• produce reports;
• analyse data;
• support project coordination; and
• increasingly handle functions previously carried out by junior employees. 

For employers, the financial calculation becomes straightforward. If the cost and legal risk of employing people rises while AI becomes cheaper and more capable, investment naturally shifts toward automation. This is especially true for repetitive, process-driven or administrative work. The concern is not necessarily that AI “eliminates all jobs”. More realistically, AI changes the threshold at which hiring becomes commercially worthwhile.

Businesses may simply decide to hire fewer people, hire later, or require more experience before recruiting. That creates a dangerous bottleneck for younger workers attempting to enter the labour market. And ironically, many of those junior positions historically formed the foundation of future leadership and technical expertise.

Construction and the subcontractor economy

The UK construction industry already offers a real-world example of this behaviour.

High employment costs and employment regulation have contributed to a sector heavily reliant on subcontracting, self-employment, temporary labour and CIS arrangements. Many firms prefer labour flexibility over permanent PAYE employment because it reduces long-term operational risk.

As Labour regulation increases, that trend may accelerate even further. The danger is that businesses become structurally less willing to invest in apprenticeships, graduate schemes, mentorship, and even long-term workforce development.

This may improve short-term financial efficiency, but it risks creating severe long-term capability gaps across the industry.

The broader economic question

None of this means employment rights are wrong. Nor does it mean businesses should operate without worker protections. The real question is whether the UK is placing too much tax and regulatory burden on employment itself, particularly during a period of weak productivity growth and economic fragility.

Many economists argue that taxing labour heavily discourages economic activity because work itself is one of the core drivers of growth.

In contrast, governments may eventually need to consider shifting more taxation toward consumption, land, environmental impacts, rather than continuing to increase the cost of employing people. If employing humans becomes consistently more expensive than automating them, businesses will increasingly choose the latter. And, of course, once that transition accelerates, reversing it becomes far harder.

Conclusion

The UK faces a delicate balancing act. Workers deserve fair protections, decent pay and security. But businesses also need confidence, flexibility and economic incentive to hire. Right now, many employers feel the balance is moving too far toward cost and risk.

Combined with rapid advances in AI and automation, rising labour taxation and expanding employment obligations may unintentionally accelerate a future where businesses employ fewer people, not necessarily because they want to, but because the economics increasingly point them in that direction.

The long-term danger is that Britain does not simply create fewer jobs; it creates fewer future professionals. And in sectors like construction and property, where expertise takes years to develop, the consequences of that could be felt for decades.