Unemployment falls by 6,000 to fresh 26-year low

The labour market showed its first signs of slackening last month despite new figures yesterday showing that unemployment has hit a fresh 26-year low while pay growth continued to run above the Bank of England's target.

The number of people out of work and claiming benefit fell by 6,000 in August to 945,600, the lowest level since October 1975.

This meant the claimant count rate was unchanged at 3.1 per cent, the same as in July.

Separate figures for pay and bonuses for July, the latest data available, showed there had been an unexpected slowdown in the annual rate of growth to 4.6 from 4.7 per cent.

However, this was still above the 4.5 per cent "speed limit" the Bank believes is compatible with meeting its inflation target.

The driver behind the slowdown in pay growth was the private sector, where earnings grew 4.3 per cent, its lowest level since August last year.

In contrast, public sector employees enjoyed a fifth successive month of pay growth as the annual rate hit an eight-year high of 5.6 per cent.

There was also a sharp fall in bonuses compared with a year ago. "This may be a signal that the difficult business climate is starting to filter into pay packets," said Daniel Kaye, UK economist at consultancy Capital Economics.

"A combination of slower pay growth and concerns about job security may ultimately begin to filter through to consumers' confidence about their own personal finances," he added.

Other economists said there were hints of a slowdown. The Government's preferred measure of unemployment showed a rise of 13,000, its second successive monthly increase.

Meanwhile, the number of unemployed people rose 13,000 to 28.2 million, the smallest rise for several quarters.

Ciaran Barr, chief UK economist at Deutsche Bank, said: "With earnings growth low, and labour demand seeming to ease, this report does not stand in the way of another rate cut which is likely to be next month."

The breakdown of the employment data showed that manufacturers shed 37,000 workers in the second quarter of the year while the services sector grew by 76,000.

The largest gains were in finance and business, which expanded by 31,000 in the face of an increasingly gloomy climate, the public sector took on an additional 27,000 workers and construction employment grew by 17,000.

On an annual basis, the recession-hit manufacturing sector saw employment fall 3 per cent, or 119,000, to 3.83 million. There has been a spate of announcements of job cuts recently, including high-profile companies such as the telecom equipment giant Marconi and British Airways.

Adam Cole, an economist at HSBC, said: "The pace of tightening in the labour market is clearly slackening and it is probably only a matter of time before we see monthly increases in unemployment."

Matthew Taylor, the Liberal Democrat's Treasury spokesman, said the latest figures showed the "huge divide" between a continuing boom in services and the state of the manufacturing and farming sectors. "The divisions in the British economy left untackled by the Chancellor are unmistakable and a real risk to the British economy," he said.

The Government made no comment on the figures in light of the US outrage on Tuesday.

There were no data on vacancies as publication has been suspended because of concerns they had been distorted by the launch of the Government's Employer Direct initiative.