The UK’s employment rate – the best measure of the health of the labour market – has risen to 74.8 per cent of the working age population.

The number of people in work between September and November was up by 98,000 on the previous quarter to 28.491m – a rise of 0.2 percentage points.

The figures from the Office for National Statistics will please ministers but increase fears that the UK’s labour market is growing tighter, that employers will find it increasingly difficult to fill vacancies and that wages growth could accelerate as a result, creating inflationary pressures.

The ONS also revealed that vacancies at state job centres – which account for only a minority of total vacancies but are seen as a good guide to the trend – rose by 4,400 to 648,800 in the last quarter of 2004.

Average earnings in the three months to November were up 4.2 per cent on the year – a 0.1 percentage point increase. But growth in earnings excluding bonuses – seen by many as a better indication of underlying changes in earnings – was unchanged at 4.4 per cent.

The number of people seeking work but unable to find it – the definition of employment preferred by most economists – rose by 13,000 to 1.400m, despite the rise in employment. But the employment figures were boosted by a strong fall of 73,000 in the number of the “economically inactive” – people not in a job and not looking for one either.

Although New Labour has managed to cut unemployment, it has had less success in getting some of those groups not even looking for work – such as many of the sick and disabled - into the labour market. Wednesday’s figures may therefore be welcomed by frustrated Whitehall officials.

Analysts have devoted much thought recently to how the UK’s economy can continue growing without creating worse labour shortages. The Chartered Institute of Personnel and Development recently suggested that a mixture of immigration and the absorption of people on incapacity benefit into the workforce could help to ease shortages – although many people on incapacity benefit have either low skills or the wrong kind of skills for the UK’s increasingly service-based economy.

The number of people claiming unemployment benefit fell 6,200 in December to 826,300. However, this statistic has gradually been downgraded in importance in the eyes of many economists.

Over the long term, the UK’s employment rate has kept fairly stable. It compares well with that of most of the UK’s competitors.

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