Unemployment has increased to its highest level in four years as intense foreign competition continues to hit the UK’s traditional manufacturing industries.

National Statistics reported that the number of people looking for work increased by 108,000 in the last three months of 2005, taking the total unemployment to 1.54 million or 5.1 per cent of the workforce, the highest level since October 2002.

Manufacturing industries were hardest hit with employment down 106,000 in the last three months of the year compared with the same time last year. There are now just 3.09 million people employed in manufacturing out of a total workforce of more than 28 million.

The statistics office also reported that a record 7.9 million people are now classified as "economically inactive" meaning they are unwilling or unable to work, the highest number since records began in 1971.

The one bright spot in today’s numbers was that the claimant count, which measures the total number of people out of work and claiming job seekers allowance, fell by 2,000 in January to 904,200, the first monthly fall for a year.

There was also good news for the Bank of England, as the rising unemployment appears to have kept wage pressures in check. The statistics office said average earnings including bonuses were just 3.6 per cent higher in the three months to December compared with the same time last year.

The Bank of England, which has kept interest rates unchanged at 4.5 per cent since last August, has been worried that that a year of soaring fuel costs might trigger an inflationary spiral with wages and prices both rising, forcing it to raise interest rates at a time of subdued economic growth.

Analysts said today’s numbers were mixed and did little to clarify the immediate outlook for interest rates. Howard Archer, chief UK economist, at Global Insight said: "We suspect the labour market will weaken further over the coming months as growth is subdued. This is likely to limit consumer spending.

"The earnings data may encourage the Bank of England to hold off from cutting interest rates in the immediate future while it seeks sustained evidence that the pay settlements for 2006 are remaining contained. However, we believe that interest rates are likely to be trimmed by a further 25 basis points by May."

Wage growth in the public sector continues to outstrip pay rises in private companies, up by 4.4 per cent compared with 3.3 per cent, the statistics office said.

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