Jobless claims fall in Feb by most since 1997

A man enters a job centre in Coventry, August 12, 2009.

LONDON (Reuters) - The unemployment benefit queue shrank in February by the biggest amount since 1997, official data showed on Wednesday, surprising markets and giving the Labour government a pre-election boost.

However, figures from the Office for National Statistics also showed the overall employment rate at its lowest since late 1996, suggesting the path to recovery will be a bumpy one.

An election is widely expected on May 6 and Labour, way behind in opinion polls for much of the last year and in power since 1997, is now expected to give the Conservatives a real run for their money.

Labour has pinned much of its hopes on securing recovery after an 18-month recession but party strategists had been concerned that unemployment data, which tends to lag headline growth figures, would stay bleak during the election run-in.

Figures from the Office for National Statistics showed the claimant count -- the number of people claiming jobless benefits -- fell by 32,300 in February, confounding analysts' forecasts for a rise of 8,000.

January's increase, previously reported at 23,500, was slashed to 5,300 and the claimant count rate eased to 4.9 percent, the lowest since August 2009.

"It is looking a bit better," said George Buckley, UK economist at Deutsche Bank. "It just confirms the labour market has done better in this recession than we thought it would."

SURPRISE FOR MARKETS

The number of people without a job on the wider ILO measure fell by 33,000 in the three months to January to 2.449 million. That left the jobless rate at 7.8 percent, just below forecasts for a reading of 7.9 percent.

The much better than expected data, which drove sterling higher, may help further improve the government's poll ratings before the knife-edge parliamentary election.

"We've been predicting that unemployment would increase up until the summer and then start to fall," work and pensions minister Yvette Cooper said.

"We do think that things will still be difficult for some time to come but we are right to keep that support up for jobs and the economy."

Analysts say that labour market figures have been helped during the recession by flexible working arrangements which allowed many companies to retain staff on shorter hours.

Public sector employment has also risen through the recession -- it increased by 7,000 in the final three months of last year to 6.098 million.

Despite market concerns about a record budget deficit, Labour is holding off fiscal tightening until 2011, arguing that reducing government spending would damage the recovery.

The Conservatives want to start cutting this year, warning that failing to deal with the deficit will endanger future jobs.

Clouding the picture was a 54,000 drop in the number of people in employment to 28.86 million in the three months to January -- the lowest level in four years. The employment rate now stands at its lowest since late 1996.

"The latest labour market data don't help to clear up any of the uncertainty about the economic outlook," said Vicky Redwood, an economist at Capital Economics.

There was also a smaller-than-expected rise in Britons' pay packets. Weekly average earnings rose by 0.9 percent in the three months to January compared with the previous year, little more than half the 1.7 percent rise predicted by economists.

Analysts had expected bonus payments to boost average pay at the start of the year, but a one-off tax on bonuses following the financial crisis may have had some impact.

(Editing by Stephen Nisbet)