Unemployment figures 'not a big threat to inflation'

Fears that falling unemployment will fuel higher wages and inflation are wildly exaggerated, according to a new report.

With new figures today expected to show a further big decline in headline unemployment last month, the report claims the Job Seekers Allowance (JSA) has distorted the official figures so much that they are an unreliable guide to the state of the labour market. According to Edmund Nonis, an economist at Nikko Europe, the threat of inflation posed by falling unemployment is far less than widely feared.

Since its introduction last October the JSA has distorted the headline figures, which simply record the number of people claiming unemployment benefit. The Office for National Statistics is reviewing the possibility of replacing this unsatisfactory measure with a monthly survey, an option rejected last year by the Conservative government.

Most economists have reckoned the JSA has cut the total by about 10,000- 15,000 a month, which would mean the underlying level of joblessness is still falling very rapidly.

But the Nikko paper claims that half of the 420,000 decline in the number of claimants between October and April has been due to the introduction of the JSA. This estimate, based on unemployment figures from the more reliable Labour Force Survey available up to February, is twice as big as the accepted size of the JSA distortion.

It runs counter to the consensus among City economists, many of whom believe the jobs market is already starting to overheat. They point to the steady climb in average earnings growth, although today's figures are expected to show it remaining at 4.5 per cent in April.

However, Mr Nonis concludes that the pick-up in the number of people leaving the unemployment register is almost entirely due to the removal of fraudulent claimants. It does not, he argues, reflect any underlying change in the jobs market.

The report goes on to argue that adding in people who are so discouraged they have stopped trying to find work could add another 2.5 million to the unemployment total, suggesting a "true" unemployment rate of more like 16 per cent of the workforce rather than the official 5.9 per cent.

The inflationary impact of falling unemployment will also be limited to the extent that new jobs are part-time, short-term and low-paid. Mr Nonis estimates the average wage of those entering full-time jobs from unemployment is pounds 11,500 a year,two-thirds the national average.

He adds that withdrawing benefit for fraudulent claimants means that as many households are losing a second income through the loss of benefit as are gaining income by finding work.

The report concludes: "There is no doubt that as the labour market continues to strengthen, inflationary pressures will begin to emerge in certain areas due to skill shortages. But these will be limited by the untapped pool of unemployed that exists in the UK."