Jobless rate increases 108,000 to highest level since 2003

Unemployment rose to its highest for three years in the final quarter of 2005, according to data released yesterday, while wage inflation remained tame in spite of hefty end-of-year City bonuses.

Joblessness on the official measure rose 108,000 between October and December from the previous quarter to 1.54 million - equivalent to 5.1% of the workforce and the highest since early 2003. Employment fell by 58,000 over the same period to 28.8 million, or 74.5% of the workforce.

The only good news was that the claimant count measure of unemployment (those receiving jobless benefit), showed its first fall for a year last month but only by 2,000. It has risen by more than 90,000 in the past year, although the claimant count jobless rate remains low at 2.9%.

Having fallen for more than a decade, the unemployment rate began to rise in the middle of last year, threatening one of Labour's proudest boasts: that it had all but achieved full employment. While the manufacturing sector has shed more than a million jobs since 1997, hiring by the retail sector and the government more than compensated. But now the weakness of the economy in the past 18 months is taking its toll on the jobs market. Analysts fear that rising unemployment could crimp any recovery in the economy this year and affect government tax receipts.

The data also showed that average earnings growth picked up slightly to 3.6% on the back of City bonuses but the figure remained low and analysts said there was no sign of underlying wage inflation. Once City bonuses are stripped out, earnings growth was steady at 3.8%.

John Philpott, chief economist at the Chartered Institute for Personnel and Development, said the figures were "disappointing", although he did not expect a meltdown in the labour market in the coming months. "Today's labour market figures open the door to an interest rate cut sometime this spring," he said.

The Bank of England has been concerned that last year's surge in oil prices could feed through into inflationary pay rises in the upcoming pay round. But yesterday Mervyn King, governor of the Bank, acknowledged that there had been no sign of that happening to date.

And the Engineering Employers' Federation reported that pay deals in the sector had fallen to their lowest for two years at 2.5%. David Yeandle, EEF spokesman, said: "These figures clearly demonstrate the extent to which external costs are now biting on manufacturing companies ... they are having to respond to this pressure by managing their controllable costs such as pay levels as tightly as possible."