Edison explains: Cloud on the horizon – why NEXT is bearish on the UK

The UK economy faces a period of anaemic growth, constrained by declining job opportunities, increasing regulation, unsustainable government spending and a rising tax burden that undermines productivity. NEXT, one of Britain’s leading retailers, offers a frontline perspective on employment trends that should concern policymakers and investors alike.

What are the warning signs from the jobs market?

NEXT first raised concerns about weakening UK employment two years ago. Since then, the situation has deteriorated. Vacancies continue to fall and PAYE payroll numbers are now moving backwards. The company’s own recruitment data tell a stark story: vacancies are down 35% versus two years ago, while applications have surged 76%, meaning 2.7 times more people are competing for each available position.

This squeeze on employment stems from three converging pressures: rising costs, increasing regulation and displacement through mechanisation and AI.

Exhibit 1 – Vacancies and payrolled employees

How have employment costs increased ?

Entry-level employment has become significantly more expensive. Over the past decade, the National Living Wage has increased by 88%, outstripping CPI inflation (up 38%) by a considerable margin. When employers’ National Insurance increases are factored in, the total cost of part-time employment has risen 102% since 2015.

These increases ripple upwards through pay scales, creating pressure across the entire wage structure while simultaneously incentivising businesses to automate wherever possible.

What regulatory changes are affecting employment ?

While NEXT welcomes well-intentioned employment reforms, the company warns that the Employment Rights Bill contains measures that risk reducing jobs and eliminating earnings potential, particularly for part-time flexible workers.

The bill’s extension of zero-hours protections to ‘low-hours’ contracts could undermine the working arrangements of millions. If the definition of ‘low hours’ is set too high (above four to eight hours per week), businesses will be unable to offer experienced part-time staff additional hours during seasonal peaks without converting those hours into permanent contracts.

This creates two problems: shops, restaurants and pubs cannot afford December-level staffing in February and the administrative burden of managing rolling contract offers becomes near-impossible for smaller businesses.

The unintended consequence? Employers will simply stop offering flexible additional hours to existing staff, instead relying on temporary workers, which is precisely the opposite of the bill’s intention.

Exhibit 2 – National Living Wage, wage costs and Consumer Price Index, indexed to 2015

How are mechanisation and AI affecting jobs?

The combination of rising employment costs and increasing regulation has accelerated the pace at which businesses mechanise and adopt AI solutions. NEXT’s own warehouses demonstrate this trend, with mechanisation delivering a 20% reduction in cost per unit (adjusted for wage inflation) over the past decade.

The effect extends beyond manual work. AI is increasingly improving the efficiency of desk-based activities, amplifying the displacement effect across skill levels.

Exhibit 3 – Warehouse cost per unit, indexed to 2016

What will the economic impact look like?

Unlike past recessions, in which structural changes wiped out whole industries (eg shipbuilding and steel), resulting in mass redundancies and regional slumps, this employment pressure is likely to affect most sectors gradually. Companies are responding by not filling vacancies rather than making mass redundancies, limiting sudden economic shocks but creating a different problem.

The real impact will be felt by those trying to enter the workforce or change jobs. The challenge will not be redundancy; it will be finding suitable vacancies in the first place. This resonates with reports of young people struggling to find work.

Why is NEXT cautious on the UK outlook ?

Despite multiple growth opportunities (improved product offer, expanding international presence and an enhanced online platform), NEXT remains cautious about the UK’s outlook. The company expects UK employment opportunities to continue diminishing as the effects of April’s National Insurance changes filter through the economy, dampening consumer spending in the second half of the year.

While NEXT is well positioned, with international growth offsetting UK headwinds, the company’s frontline perspective on employment trends suggests policymakers should pay close attention. The squeeze on UK jobs is real, measurable and accelerating.