A Bank of England rate-setter has warned the UK jobs market is “stuck in low gear” as young people risk “lasting scars” from employers retreating on hiring.

Claire Lombardelli, deputy governor for monetary policy at the central bank, told a City conference that the labour market was cooling “mainly through less hiring rather than more firing”.

While economic activity had proven “unexpectedly robust”, she cautioned the pattern in the labour market posed a brewing issue.

“A low-hire, low-fire labour market creates its own problems. It protects those already in work while making it much harder for those trying to get in or move on,” she said.

“The labour market has become less effective at moving people towards new opportunities. The labour market is stuck in low gear.”

The Office for National Statistics (ONS) said vacancy levels had decreased to the lowest since April 2021 in September at 691,000. This came despite the unemployment rate falling to 4.7 per cent, its lowest since July last year.

Lombardelli said the labour market could “preserve existing jobs while dropping down a gear under the bonnet”.

She warned that the costs of the hiring freeze are “falling particularly heavily on young people, for whom the first step into work has become harder”. The youth unemployment rate for those aged between 16 and 24 was surged to 16.4 per cent in the three months to July, reaching an 11-year-high.

Bank of England: Minimum wage driving youth unemployment

Lombardelli said young people now account for around 40 per cent of all unemployment and warned joblessness early in working life “leaves lasting scars on employment and earnings.”

“Missing the first steps on the job ladder delays the accumulation of skills and experience,” she said, warning that “a cyclical shortage of entry-level jobs can therefore become a structural loss of productive capacity.”

She pointed to recent increases in minimum wage as dampening demand. Labour’s manifesto promised to remove “discriminatory” minimum wage bands for young people and bring wages in line with the living wage by 2030.

But the growing jobs crisis for young people has triggered a rethink of the policy. Chancellor John Healey hiked the minimum wage by 3.9 per cent at the Budget, setting the floor for wages for over-21s at £13.20 for the coming year, while the rate for younger workers was raised by an equal 3.9 per cent to £11.27.

Healey told the BBC after the Budget that the Treasury would take equalising the rates “one step at a time” following concerns that larger rises could exacerbate youth unemployment.

Lombardelli said that for young workers, “the greater barrier may not be cost alone, but perceived risk.”

“For an employer, taking on a young person involves uncertainty and investment. New entrants need training, supervision and we hear increasingly about work readiness and the need for pastoral support,” she explained.

“When firms face uncertainty, the risk of inaction in terms of pausing hiring new workers is often less than the risk of letting experienced employees go. That asymmetry has contributed to lower hiring of young people.”

On interest rates the deputy governor said there was “likely to be a case” for another rate hike in the “near term” after a lack of evidence for weaker inflation pressures.

The Bank’s Monetary Policy Committee unanimously voted to increase interest rates to four per cent in its meeting earlier this month.