Low unemployment and higher pay add to rate rise pressure

The number of people claiming unemployment benefit in the UK fell to its lowest level since 1975 in May, according to official figures released yesterday.

The number of people claiming unemployment benefit in the UK fell to its lowest level since 1975 in May, according to official figures released yesterday. The jobless figures, together with data showing increases in wages and Thursday's comments from the Bank of England about house price rises being "unsustainable", added to the pressure for an early increase in interest rates.

"The reasons not to hike rates at the July meeting are quickly evaporating," HSBC economist John Butler said.

Though stock markets painted a gloomy picture yesterday, new figures showed that the number of people out of work and claiming benefit fell by 7,000 in May, its first drop in three months. That means 944,600 people are now claiming benefit, equivalent to 3.1 per cent of the workforce – the lowest level since October 1975.

Nick Brown, employment minister, said the figures were "encouraging" and showed Britain has a higher percentage of the workforce employed than the United States or Germany.

However, under the International Labour Organisation's definition of unemployment, which includes those out of work but not claiming benefit, the unemployment count rose by 19,000 between February and April, pushing the rate up from 5.1 per cent to 5.2 per cent.

The manufacturing industry was the worst hit, losing 173,000 jobs in the three months to April. Most of the losses were in the electrical and optical equipment, textiles, leather and clothing, and metal products sectors.

The TUC general secretary John Monks said stability in the labour market marred the "remorseless" loss of jobs in manufacturing. He argued there was no sign of inflationary pressures in the labour market and said it was "premature" to talk about interest rate rises.

Separately, average earnings in the three months to April rose 3.3 per cent on the same period last year, driven by public sector pay increases of more than 4 per cent. The average earnings figure was up from 2.9 per cent in the three months to March and was higher than expected.

Geoff Dicks at Royal Bank of Scotland said: "The combination of an unexpected (albeit small) fall in unemployment and higher-than-expected earnings is uncomfortable. The earnings numbers are not yet flashing amber – and the underlying earnings number was good – but the recovery starts with an already worryingly tight labour market."