Unemployment down to 1.6 million

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Headline unemployment fell to a seven-year low of just over 1.6 million in May. But the decline was the smallest for nine months as the distortion caused by the introduction of the Jobseekers' Allowance (JSA) dropped out of the figures. The smaller-than-expected fall, along with figures showing unchanged growth in earnings in the year to April, eased analysts' fears that the tighter job market would lead to higher inflation.

The reassurance came on the eve of the Chancellor's Mansion House speech, in which he is expected to flesh out earlier indications that the inflation target will be at least as tough as the present 2.5 per cent ceiling. "The message to the Bank of England is keep your finger on the interest- rate trigger but don't squeeze yet," said Adam Cole, UK economist at James Capel.

Andrew Smith, Employment Minister, yesterday welcomed the latest decline in the number of unemployment benefit claimants but said there was still "much to do" on the joblessness front.

The Treasury is considering how to implement the Government's manifesto pledge to create a fully independent statistical office, as part of the comprehensive spending review announced by the chief secretary, Alistair Darling, yesterday. Such a body would be free to replace the discredited claimant count measure of unemployment.

The Government believes the trend decline in the number of claimants is about 30,000-35,000 a month, rather than the 62,000 average during the six months in which the JSA was introduced. This is still higher than the 15,000-20,000 a month trend seen in mid-1996.

The more reliable, survey-based measure of unemployment has also shown a faster rate of improvement, falling by 111,000 in November-February, compared to a 184,000 drop in the claimant measure in the same months.

Other statistics in yesterday's batch confirmed the pick-up during the past year. Employment showed a robust increase of 86,000 in the first quarter, and all were full-time jobs. The number of people in Government training schemes fell by 10,000 to 180,000, the lowest for 12 years.

The jobs figures fit into the broad picture of strong growth in the economy, but reassured the financial markets that the overheating would not get out of hand.

"The labour market data look far less threatening to the inflation target than they did two months ago," said John O'Sullivan of NatWest Markets.

The number of people claiming unemployment benefit fell by 18,400 in May, compared to a drop of 56,400 in April.

Equally important to the City was the unchanged rate of growth in underlying average earnings. This stayed at 4.5 per cent in April for the third month running.