The number of people out of work rose by more than expected in February, raising concerns that employers are beginning to lay off staff in response to high interest rates.
The Office for National Statistics said the unemployment rate increased to 4.2% in February from 3.9%, well above the 4% expected by City economists.
Analysts said the cooling effects of higher interest rates were leading to more redundancies and discouraging employers from hiring staff.
Despite rising unemployment, regular pay growth excluding bonuses was stronger than expected at 6% in the three months to February, underlining the dilemma facing the Bank of England over when to start cutting interest rates. Pay growth of 6% was down from 6.1%, but stronger than the 5.8% expected by economists polled by Reuters. Total pay growth, which includes bonuses, was unchanged at 5.6%.
Yael Selfin, the chief economist at KPMG UK, said that overall the latest ONS data suggested the Bank would be on track for a summer cut in interest rates.
“The slight easing in regular pay growth will bring some comfort for the Bank of England which has relied on the pay data as a key gauge of domestic inflationary pressure,” she added.
“Moreover, the rise in unemployment rate paints a picture of a less tight labour market. The exact timing of the first rate cut will be a hot debate for the monetary policy committee in the coming months.”
The hospitality sector handed workers an average 8.4% pay raise and City workers secured an 8.1% increase.
When falling headline inflation rates were taken into account, real wages rose at the fastest pace in two and a half years.
Real total pay growth adjusted for consumer price inflation was 1.8%, while real regular pay grew by 2.1% – both were last higher in July to September 2021.
Much of the boost to wages in low-paid sectors such as hospitality came from April’s 9.8% rise in the national minimum wage to £11.44 an hour.
The National Institute for Economic and Social Research said the increase “may keep wage growth elevated” for much of the year.
“Although this is good news for employees the persistence of high wage growth together with the minimum wage hike means inflation may be stickier than previously thought, leading the Bank of England to remain cautious against an early rate cut,” the thinktank said.
Some of the highest-paying sectors were among those to see the biggest falls in pay growth. Employees in professional, scientific and communications roles were at the bottom of the pay league, after an average median salary rise of 3% in the year to February. IT workers had an average 4% pay rise over the same period.
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The inactivity rate, which measures the proportion of people aged 16 to 64 who are not working and not seeking or available to work, also increased in February as workers continued to leave the jobs market due to ill-health.
Bank of England officials have said the rising inactivity rate is a worry as it reduces the workforce and forces employers to pay higher wages, pushing up costs and inflation.
There are about 850,000 additional jobless working-age people than before the pandemic began because they are no longer seeking roles or are unable to start.
Economists believe the rise was driven primarily by higher levels of long-term sickness among younger and older workers.
“Today’s jobs figures are surprisingly poor, with a steep fall in employment and a sharp rise in those out of work, including an unexpected rise in unemployment,” Tony Wilson, the director at the Institute for Employment Studies, said.
“However, most concerning is the rise in economic inactivity, which is the measure of those not in work but not looking for work, which is even higher now than it was in the depths of the pandemic.”
Ben Harrison, the director of the Work Foundation at Lancaster University, said the UK workforce was “sicker and poorer”, and “an international outlier”.
A record 2.82 million people are economically inactive due to long-term sickness. Between December 2019 and February 2020 717,000 people had become economically inactive due to ill health, Harrrison said, “and the tide is not turning”.
