Money guides: unemployment benefit explained

The number of people signing on for jobless benefits jumped at the fastest rate since 1971 last month as the number of people out of work rose to more than two million, the highest level since Labour came to power in 1997, official figures show.

The number of people claiming jobless benefits rose by a record 138,400 last month, taking the total number in dole queues to 1.39 million, figures from the Office for National Statistics show.

The wider survey-based measure of unemployment showed that the number of people out of work jumped by 165,000 in the three months to January, to 2.03 million, the highest level since Tony Blair became Prime Minister.

Some City economists forecast that unemployment is set to spiral much higher, to about 3.3 million, levels not seen even during the 1980s recession.

Sterling fell to fresh seven-week low against the euro of 93.96 pence, while the pound hit a session low against the dollar at $1.3848 as investors digested the bleak figures.

Howard Archer, chief economist at IHS Global Insight, said: “Reports of companies laying off workers are prevalent, while an increasing number of companies are folding. With the economy seemingly set to contract through 2009 and very possibly beyond before starting to recover gradually, we expect unemployment to rise to a peak of 3.3 million late next year or early 2011.

This indicates the scale of the downsizing in private companies as businesses battle slumping demand by cutting costs - primarily wage costs.

Workers who keep their jobs are also facing pressure as firms freeze pay. Analysts were alarmed by figures showing that average earnings fell by 0.2 per cent during January, the first fall on record. This dragged the annual pace of wage growth in the three months to January to 1.8 per cent, down from 3.1 per cent.

Colin Ellis, European economist at Daiwa Securities, said: "The fact that people now have less money in their pockets than a year ago is a clear signal that the UK is now knocking on deflation's door."

Alan Tomlinson, partner at licensed insolvency practitioners Tomlinsons, said that the situation was set to deteriorate further. "I have been an insolvency practitioner since the Eighties and have never been so busy. Companies of all sizes and in all sectors are folding by the day, putting more and more people out of a job.

"The CBI's prediction, last month, that unemployment will peak at just over three million in the second quarter of 2010 could prove to be wildly optimistic."

The British Chambers of Commerce urged the Government to take more action. David Kern, chief economist at the BCC, said: "The outlook for unemployment is worsening and there is an urgent need for action. At this rate unemployment looks set to reach 3.2 million in 2010. Even with some staff accepting pay freezes and working fewer hours, it is clear that employers are facing significant financial pressures.

“There is a vital need for steps specifically aimed at preventing a damaging loss in our industrial skills base. Temporary measures such as wage subsidies need to be seriously considered.”

However, some analysts said that today's figures showed that the public sector was a "recession-free" zone, as the total number of people employed rose by 15,000 in the final three months of last year to 5.783 million.

The sharp rise in unemployment will come as a further blow to the Government after the International Monetary Fund warned that the recession will last longer than in other countires.

The IMF is set to predict that the UK economy will shrink by a further 0.2 per cent in 2010, damaging Mr Brown's hopes of some green shoots of recovery before next summer's election. The IMF also revised down its forecast for the British economy this year again, saying that GDP would fall by 3.8 per cent, rather than the 2.8 per cent drop it forecast at the beginning of the year.

The Liberal Democrats said that the Government's own forecasts for a 760,000 increase in unemployment was too low, as analysis of the last two recessions showed that the number of people claiming unemployment benefits increased by an average 1.45 million in the first three years.

Steve Webb, the Liberal Democrats work and pensions spokesman, said that if Government predictions prove wrong, an extra 700,000 could claim unemployment benefits in three years time, costing the taxpayer £2 billion more than predicted.

He added: “The Government is living in a fantasy land over increasing unemployment. It is clear from recent recessions that we are going to see a dramatic rise in people claiming unemployment benefits over the next three years but ministers are clinging to wildly optimistic and naive forecasts."

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