UK unemployment rises to 4.2%, according to ‘experimental’ ONS estimates

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The UK labour market has held up slightly better than thought as higher interest rates weigh on economic activity, according to official data released on Tuesday.

The Office for National Statistics said the unemployment rate rose to 4.2 per cent in the three months to August, up from 4 per cent in the previous quarter. The employment rate fell 0.3 percentage points to 75.7 per cent in the same period.

These estimates should be treated as “experimental”, the ONS said, as they were for the first time derived from tax records and benefits claims, rather than the labour force survey on which its figures are usually based.

The statistics agency was unable to publish the usual figures because of worsening problems with its survey. The response rate to the LFS has fallen since the pandemic to levels where its results are no longer reliable, with a divergence in recent months from other data sources.

Tony Wilson, director of the Institute for Employment Studies, a consultancy, said that since there had also been issues over the years with the alternative data sources the ONS had used, “it is not a good sign that they are now considered more reliable than the official survey”.

Hannah Slaughter, economist at the Resolution Foundation think-tank, said: “The poor quality of this data will hamper key decisions, including the Bank of England’s on interest rates and the government’s on labour market inactivity.”

The new estimates paint a slightly stronger picture of the jobs market than previous figures, which put unemployment at 4.3 per cent in the three months to July.

The ONS also gave a lower estimate for economic inactivity than its previous figures had shown, saying 20.9 per cent of working-age adults were neither in a job nor looking for one in the latest period. 

Mel Stride, work and pensions secretary, said this showed inactivity had now fallen by more than a quarter of a million since its pandemic peak, with long-term unemployment also falling.

However, with unemployment still higher overall than the Bank of England had forecast for the third quarter of the year, the figures are unlikely to change economists’ expectations that the Monetary Policy Committee will pause tightening and leave interest rates at 5.25 per cent next month.

The ONS last week released figures showing payroll employment fell by 11,000 in September to 30.1mn, after a decline of 8,000 in August, with vacancies also continuing to fall.

But the slowdown in hiring has not yet been enough to cool pay growth. This remained close to record highs with average earnings up 7.8 per cent year on year in the three months to August, even after excluding bonus payments that were unusually high due to one-off public sector pay deals.

Thomas Pugh, economist at the audit firm RSM UK, said the figures still pointed to a weakening labour market and that it was “probably only a matter of time before the recent loosening . . . feeds through into significantly slower wage growth”.