Rise in unemployment disguises underlying strength of UK labour market

Figures released by the Office for National Statistics show that unemployment has risen on both the Labour Force Survey (LFS) and claimant count measures, while manufacturing employment continues to fall. These figures should not be interpreted as a portent of bad economic news, according to Dr John Philpott Chief Economist at the Chartered Institute of Personnel and Development (CIPD).

Commenting on the latest official labour market statistics released today by the Office for National Statistics, Dr Philpott said: On the contrary, a combination of strong growth in total employment, fewer redundancies, falling numbers of economically inactive people and an easing in underlying wage pressure indicates that the labour market remains in robust health.

In fact today’s figures represent a landmark in showing that by the start of 2005 the employment rate had reached a record 75%. Moreover, while the start of the annual bonus season has pushed up growth in average earnings to 4.7%, there has been a welcome easing in underlying wage pressure as measured by average earnings excluding bonuses (down 0.1 percentage point to 4.3%). This is particularly good news.

Together with the fall in the numbers of economically inactive people and a fall in unfilled vacancies this suggests an improved matching between labour supply and demand. It also greatly increases the prospects that interest rates will peak at 4.75% in the current economic cycle.

The rise in unemployment is of course disappointing, especially on the claimant count measure. Higher LFS unemployment is explained by rising numbers of economically inactive people, particularly women, entering the jobs market to look for work. The rise in claimant unemployment is both more worrying and perplexing, suggesting some worsening of job prospects for unemployed claimants since the start of 2005, with more people joining the count and fewer leaving the count.

However, given the overall strong growth in employment this is likely to reflect a shift in the relative situation of different groups of jobless people rather than a general easing in the demand for labour.