U.K. September Unemployment Rises To 5-Year High On Immigration

U.K. September Unemployment Rises to 5-Year High on Immigration
By Brian Swint

Oct. 18 (Bloomberg) — Unemployment in the U.K., Europe's second-biggest economy, increased to a five-year high last month as immigrants joined the labor pool faster than the economy could create new jobs.

The number of Britons claiming jobless benefits rose by 10,200 to 962,000, the highest since December 2001, the Office for National Statistics said today in London. Economists expected no change, according to the median of 30 estimates in a Bloomberg survey. The unemployment rate held at 3 percent for a seventh month.

Faster economic growth this year is attracting migrant workers to Britain, swelling the ranks of jobless while lifting employment to a record. Bank of England policy makers are concerned that inflation, which stayed above its 2 percent target for a fifth month in September, may prompt workers to demand higher pay next year.

“The supply of labor is outstripping demand because of immigration,'' Richard McGuire, an economist at the RBC Capital Markets in London. “It's not that people are losing their jobs. This won't stay the Bank's hand in November, when we expect a hike as the pickup in inflation sparks concerns about higher wages.''

Investors expect the bank to follow August's quarter point interest-rate increase with another one before the end of the year. The rate on the December futures contract was 5.27 percent at 8:50 a.m. in London, up from 5 percent at the start of August. The contract settles to the three-month London inter-bank offered rate for the pound, which has averaged about 15 basis points more than the central bank's rate for the past decade.


An inflow of at least 400,000 eastern Europeans who have been given work permits in the U.K. since joining the European Union has helped keep wages and inflation in check, Bank of England Governor Mervyn King said Oct. 10. Still, “we will need to keep our eye on the ball and monitor closely the evolution of wage and cost pressures.''

The inflation rate used by public-sector wage negotiators as a benchmark for the cost of living reached 3.6 percent in September, the highest since June 1998, as fuel and mortgage- interest costs rose, the statistics office said yesterday. The headline inflation rate stayed above the bank's 2 percent target for a fifth month.

Average earnings growth slowed to 4.2 percent in the quarter through August from 4.4 percent in the period through July, the statistics office said. Economists had expected the rate to hold at 4.4 percent. Excluding bonuses, wage-growth moderated to 3.6 percent, the lowest since August 2003, from 3.7 percent in the previous period. Economists expected wage growth to be unchanged at 3.7 percent.

Basic Pay

Basic pay growth slowed in all sectors except services, where it was unchanged at 3.5 percent, and the public sector where it quickened to 3.2 percent from 3 percent.

The $2.1 trillion U.K. economy will grow about 2.8 percent this year, up from 1.9 percent in 2005, the Bank of England predicts. Faster growth and surging energy prices will keep the inflation rate above its 2 percent target for the rest of the year, the central bank says.

“King has made it clear they're not sure if there's a real loosening in the labor market because of greater participation,'' said Peter Newland, an economist at Lehman Brothers International in London. “They're concerned about the outlook for inflation. The case for a rate hike is reasonably clear cut.''

According to International Labor Organization measures, the work force grew by 165,000 over the quarter through August to a record 30.7 million. Employment rose 120,000 to a record 29 million, and unemployment rose 45,000 to 1.7 million, or 5.5 percent of the workforce.

The jobless rate is below the 7.9 percent in the dozen nations sharing the euro, while higher than the 4.7 percent in the U.S.

The U.K. factory workforce shrank by 82,000 in the quarter through August from a year earlier to 3.04 million, the lowest since records began in 1978, the statistics office said.

Rising unemployment may deepen the unpopularity of Prime Minister Tony Blair, whose Labour Party government lags behind the Conservatives in opinion polls. Uninterrupted economic growth since Labour came to power in 1997 helped Blair win a third term in May 2005.

To contact the reporter on this story: Brian Swint in London at bswint@bloomberg.net .

Last Updated: October 18, 2006 04:37 EDT