Following the steeper-than-expected decline in inflation reported earlier in the week, the combined good news on jobs and pay encouraged hopes that the Monetary Policy Committee will cut interest rates again. Other figures yesterday suggested the Government's borrowing is on track to meet the Budget target.
However, public-sector pay could test future government spending plans; it has accelerated since the election to reach nearly the same pace as private-sector wage growth, yesterday's figures showed.
The number of people claiming unemployment benefit fell by 6,500 to just under 1.3 million in May, leaving the jobless rate at 4.5 per cent. The number unemployed on the international definition fell by 23,000 in the three months to April to 1.8 million. A rise of 45,000 in the number in work took employment to a new record of 27.6 million in the same period. However, total hours worked declined slightly.
Despite the further improvement in unemployment, the year-on-year growth in average earnings slowed unexpectedly to 4.6 per cent from 4.8 per cent. Public-sector pay growth edged up to 4.2 per cent, but private sector increases slowed to 4.6 per cent from 5 per cent.
"It is very reassuring that the labour market is levelling off at a point where it is not an inflationary threat," said Leo Doyle, an economist at Dresdner Kleinwort Benson.
Andrew Smith, the employment minister, said the latest fall in the jobless total was partly down to the New Deal. "The New Deal for Young People is helping more people to join the active labour force and move into the world of work," he said. He emphasised the need for continuing wage restraint in both public and private sectors.
The news on jobs and pay encouraged those who believe there has been a permanent improvement in the labour market. Sir Alan Budd, who has just stepped down from the MPC, said this week he was prepared to believe policies had lowered the rate of unemployment below which inflation would take off.
Mr Doyle said: "The New Deal must be bringing more people into the jobs market, and there is no evidence the minimum wage is doing any harm."
Many economists expect unemployment to rise later this year, in reaction to the earlier slowdown in growth. But with growth now recovering again, the rise should be limited.
Manufacturing continued to shed jobs, with employment down by 50,000 in the three months to April. This helped boost productivity growth in the sector.
Separately, the Treasury reported a pounds 1.6bn public sector net cash requirement (PSNCR) in May, much lower than expected. Net borrowing was pounds 3.5bn. Although only the second month of the financial year, analysts said borrowing was on track.
Revenues, especially income tax receipts, grew strongly in the year to May. Government spending rose modestly after a surge at the end of last financial year.