Jobless surge heaps pressure on George Osborne

Chancellor urged to change tack on economy as unemployment figure hits 17-year high

George Osborne came under mounting pressure to change his economic strategy after unemployment rose to 2.57 million yesterday, its highest level for 17 years.

Labour said the gloomy figures showed the Government's policies were hurting but not working. The Opposition's calls for the Chancellor to slow the pace of his spending cuts were endorsed by Christopher Pissarides, the London School of Economics professor who won the Nobel Prize in economics last year. He told the New Statesman magazine that Mr Osborne was being "inflexible" and warned the cuts could "slow the recovery and may even cause a double-dip recession".

In a highly charged Commons debate, Ed Balls, the shadow Chancellor, clashed with Mr Osborne as he repeatedly asked him how long he would stick to his strategy before adopting the more flexible approach the International Monetary Fund said may be necessary.

"Plan A is not working, the markets know it," said Mr Balls. But the Chancellor refused to countenance a change of course. Claiming that delaying the cuts would do more harm than good, he produced new Treasury figures showing that a 1 per cent rise of interest rates would cost families £10bn a year in higher mortgage payments. He insisted the Government was "sorting out the mess that we inherited", which could not be done overnight.

Yesterday's figures from the Office for National Statistics (ONS) show that the British workplace no longer looks like a country for old men or women. The number of over-65s in employment fell by 74,000 in the three months to August – the biggest drop in employment among that age group since records began in 1992.

The number of over 65-year-olds in work has grown since the recession but the trend is now going into reverse.

The default retirement age ended on 30 September, leading some to speculate that employers took their opportunity to get rid of older workers before the deadline. Michelle Mitchell, charity director of Age UK, said: "The indications are that the dramatic fall is the result of many employers rushing to use the final months of the default retirement age to fire staff for no reason other than they are aged over 65."

But Nick Palmer of the ONS said the likely explanation is that a large proportion of those over-65s in employment work part-time and in the public sector – the areas where most jobs are being shed because of the cuts.

Young people are being squeezed just as much as the old by the weak job market. Yesterday's figures showed that youth unemployment has reached 991,000, meaning that roughly one in five young people are jobless.

The number of people in public sector employment fell by 111,000 between March and June, while the private sector created just 41,000 jobs, dashing the Government's hopes of a private sector-led recovery.