The Office for Budget Responsibility (OBR) has warned that Labour’s Employment Rights Act 2025 is likely to have a negative effect on the UK economy, with additional costs and reduced flexibility for employers expected to outweigh potential improvements in worker productivity.
First assessment published alongside Budget
The assessment, published alongside the 28 October 2026 Budget, marks the first time the independent fiscal watchdog has examined the likely economic effects of the Act in its forecast. The OBR identifies uncertainty for businesses, higher labour-related costs and reduced operational flexibility as potential pressures on economic activity.
No numerical downgrade attributed to the Act
Crucially, the OBR has not assigned a numerical reduction to its economic forecast for the legislation. It says the size of the effect is too uncertain to make an explicit adjustment. The assessment is therefore a qualitative judgement about the likely direction of the impact, not a calculation of how many jobs or how much GDP will be lost.
Smaller impact than earlier proposals
The watchdog also judges that the legislation as finally enacted is likely to have a substantially smaller negative impact than the original proposals made in 2024. Changes made during the legislative process included retaining a qualifying period for unfair-dismissal protection rather than implementing the originally proposed day-one entitlement. The OBR highlights continuing uncertainty around the final design of measures affecting zero-hours contracts.
What the law changes
The Employment Rights Act 2025 introduces a series of reforms to employment protections, including changes to unfair dismissal rules, trade union rights and protections for workers. Measures are being implemented in stages. Supporters argue that stronger rights could improve job security, workplace standards and productivity; employers have raised concerns about compliance costs and flexibility. The OBR’s assessment weighs the likely economic effects rather than judging the wider social merits of the legislation.
Labour market already under pressure
In its latest forecast the OBR expects unemployment to peak at 5.1% in the second quarter of 2027 before declining later in the forecast period. It also points to pressures associated with earlier increases in employer National Insurance contributions and the National Living Wage. The unemployment projection should not be presented as a forecast caused solely by the Employment Rights Act: multiple economic factors are involved.
Government’s own analysis
An earlier government economic assessment estimated around £1 billion in annualised direct business costs from the Act’s monetisable provisions, alongside around £600 million in annualised household benefits. The assessment cautioned that important benefits could not be robustly monetised and that its cost-benefit figures did not represent a complete judgement of the policy’s value to society. Those figures are separate from the OBR’s October 2026 assessment.
Further scrutiny as measures take effect
The OBR’s findings add an independent economic assessment to the debate over the Government’s employment reforms. Their eventual effect on hiring, wages, productivity and business investment will depend on how the legislation is implemented and how employers respond. For now, the watchdog expects a negative effect on potential output but has not quantified it in its central forecast.