Recent data suggests UK service sector employers are becoming more cautious about hiring, with many businesses turning to automation instead.

The latest purchasing managers’ index (PMI) shows that staffing levels in the sector fell again in January. Job losses accelerated compared with December, continuing a trend that began in October 2024.

According to the survey, this represents the longest period of workforce reductions in the sector for 16 years.

In many cases, businesses are not actively cutting roles but are choosing not to replace employees who leave voluntarily.

Automation filling the gap

The PMI survey, compiled by S&P Global, suggests that companies are increasingly using automation to improve efficiency and deal with labour shortages.

Technology is allowing organisations to streamline processes that previously required additional staff. At the same time, uncertain market conditions and squeezed margins are making businesses more cautious about expanding payroll.

That’s significant because the services sector accounts for almost 80% of UK economic output. It includes industries such as hospitality, professional services and financial firms.

Pressure on entry-level roles

Entry-level positions appear to be the most affected.

Several cost pressures are converging at the same time:

• increases to the national living wage
• higher employer National Insurance contributions
• rising energy costs
• higher food and business rate expenses

For many organisations, these rising employment costs make it harder to justify additional recruitment.

Instead, some businesses are investing in automation or process improvements to manage workloads.

AI concerns add to the debate

The conversation around automation has intensified recently, following claims that artificial intelligence could replace parts of professional roles.

This was highlighted by an announcement from Anthropic, the developer of the Claude chatbot, which suggested its technology could automate aspects of legal work.

The announcement triggered share price falls among publishing and data businesses. The reaction started in London markets and quickly spread globally, even as the FTSE 100 reached a record high.

While automation and AI are still evolving, investors are clearly paying attention to how these technologies might change labour markets.

Despite job cuts, business activity is improving

Despite the reduction in hiring, the broader services sector is showing signs of growth.

The PMI rose to 54 in January, up from 51.4 in December, marking the fastest expansion since August.

When combined with manufacturing data, overall UK business activity reached a 17-month high. Improved confidence following November’s Budget announcement appears to have supported that momentum.

In other words, businesses are still growing — they are just becoming more cautious about how they deploy labour.

What this means for businesses

For many business owners, the issue isn’t automation versus people. It’s about balancing rising employment costs with productivity.

If margins are tightening, it’s natural to look for ways to operate more efficiently. That might mean technology, restructuring processes, or simply reviewing whether staffing levels still match the current stage of the business.

The key is understanding how those decisions affect cashflow, profitability and long-term growth.

If you’re navigating rising costs, hiring decisions or changing margins, it’s worth stepping back and looking at the numbers properly before making big changes.



If you’d like to talk through how these trends might affect your business, I’m always happy to have a straightforward conversation.