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Labour Market ‘Close to Capacity’

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The Chartered Institute of Personnel and Development has warned that the UK labour market is operating close to capacity as the number of people out of work and claiming benefit fell to its lowest level since June 1975.

Latest figures from the Office of National Statistics show there is little chance of skills shortages drying up. Last month unemployment fell from 2.7% to 2.6%, equivalent to a reduction of 11,000 and bringing the total unemplyed to 813,200.

On the government's alternative measure - the labour force survey - the number of jobless people rose by 32,000 in the three months ending in December. Employment also rose by 90,000 as the improved chances of finding work encouraged an additional 122,000 to enter the labour market.

Earnings growth in the three months to December stood at 4.3% up 0.1 percentage points on the November rate.

CIPD chief economist Dr John Philpott said: "An employment rate close to 75% and underlying growth in average earnings of 4.5% indicates that the UK labour market is now operating close to full capacity.

"Although unemployment rose by 32,000 in the three months to December this was due to a large fall in the number of economically inactive people; more than 60,000 of these entered the labour market to take up or search for jobs. While an increase in the supply of labour is welcome, and might in due course ease wage pressure, there is a serious question mark over the ability of many available jobless people to fill the 650,000 vacancies currently on offer."

Dr Philpott added that the combination of strong demand for labour and limited effective supply meant there was a risk of inflation, which in turn could mean a rise in interest rates.

The Bank of England, yesterday adopted a "wait and see" approach to interest rates, with no rise this month. However Mervyn King, the Bank's governor, said that higher earnings growth, which is exceeding the government's 2% target, posed the biggest threat to inflation.

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