After the recent fall in inflation more welcome news comes for the coalition government in the form of a surprise drop in unemployment and economic inactivity as well as a rise in employment.

The number of both full and part time employees rose in the three months March to May 2012 with the age group of 25-24 be3nefitting the most.

One point to also note is that the number of those in employment aged 65 and over also rose by 52,000 and now stands at some 929,000, which is the highest level since comparable records started in 1992.

The unemployment rate, at 8.1% was down 0.2% on the previous quarter and the number of economically inactive people for the age group 16-64 fell 61,00 to 9.21 million.

Although on the face of it good news for now Melanie Bowler, economist at Moody’s Analytics, says there is much behind the figures and expects the situation to reverse.

The headline ILO-harmonised unemployment rate for the U.K. continues to surprise to the downside. The rate slipped to 8.1% in the three months to May, from 8.2% previously. The national claimant count jobless rate, which is a month ahead of the ILO data, was unchanged at 4.9% in June. With the economy back in recession, and the outlook downbeat, job creation prospects are dim and the unemployment rate is expected to tick higher once again.” She said.

The unemployment rate in the U.K. reported another surprise downtick. This, combined with the relatively strong increase in the number of job vacancies advertised, is very welcome news given the difficult economic conditions. Nevertheless, caution is urged when interpreting today’s unemployment figures.

The underlying data show a massive 46.7% q/q and 28.9% y/y increase in the three months to May in the number of people in government supported training and employment programmes. This may go a long way to explaining the downtick in the unemployment rate. And given the temporary nature of such programmes and relatively insecurity associated with them does not suggest the U.K. labour market has fundamentally improved. The previous downtick reported in the unemployment rate in March was almost fully due to an increase in part time employment rather than showing a fundamental improvement which an increase in full time employment is associated with.

Indeed, the downtick in the U.K. unemployment rate is unlikely to last. We expect it will start to tick up again in coming months. With the economy back in recession, and the outlook downbeat, firms will be reluctant to take on new hires and redundancies are likely to increase in those sectors struggling the most, such as retail, manufacturing and financial services. At the same time, as part of fiscal tightening, public sector job losses are ongoing. Employment in the public sector fell by 39,000 in the first quarter and was down by 278,000 from a year earlier.”

But Nida Ali, economic advisor to the Ernst & Young ITEM Club says the figures are encouraging and show underlying strength and commented:

These figures are very encouraging and point to underlying strength in the labour market. Not only has the headline unemployment rate fallen, but figures for full-time employment and vacancies are much improved as well. Today's release further supports our view that upward revisions to the recent GDP data are on the cards.

However looking ahead, it may be difficult to sustain the downward trend in unemployment. Recent activity indicators have been sluggish, implying that the private sector will find it increasingly difficult to create jobs. With public sector employment expected to keep falling, overall unemployment will probably nudge up in the coming months, peaking around mid-2013.

Wage growth is still very soft and below the inflation rate which implies that individuals' real incomes are continuing to fall. However, even though we don't expect much of a pick-up in pay growth in the near future, the ongoing decline in the inflation rate should help to stabilise real incomes in the second half of the year.”

Portsmouth Job Centre by Basher Eyre

Portsmouth Job Centre by Basher Eyre

Image by Basher Eyre [CC-BY-SA-2.0 (http://creativecommons.org/licenses/by-sa/2.0)], via Wikimedia Commons

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