1.97 million people out of work

MAn carrying a box as he leaves his office

The number of people out of work climbed to 1.97 million between October and December, up 146,000 from the previous three months and up 369,000 from the previous year.

The Office For National Statistics (ONS) reports both a fall in the number of people in employment and the number of vacancies, and a rise in the number of people claiming benefits.

Wage growth has also fallen, but largely as a result of scrapped bonuses with earnings growth excluding bonuses unchanged.

More to come? 

Economists largely expected the December figure to top the two million mark - but the smaller-than-predicted increase in unemployment shouldn't be heralded as good news.

Vicky Redwood, UK economist at Capital Economics, describes the latest labour market data as "pretty awful".

"Much worse is to come – these figures won’t even fully reflect the effects of quarter four's sharp contraction in the economy," she says. "We still think unemployment will reach 3.5 million by the end of 2010."

Howard Archer, chief UK and European economist at IHS Global Insight, agrees that the credit crunch has not yet revealed its full impact.

“The labour market news is less awful than feared, but this really is of very little comfort as the data is still pretty horrible," he says. "Sharply contracting economic activity, persistent very tight credit conditions and depressed business sentiment are taking a major toll on jobs, and there can be little doubt that worse is to come."

On a positive note, however, the ONS' figures suggest that the recession has not yet had a negative impact on wages, excluding bonuses.

"The headline rate of average earnings growth excluding bonuses held constant in December and has been 3.6% for the past five months," explains Redwood. "What’s more, falling inflation means that real earnings growth is accelerating."

But with job losses continuing, people are likely to start putting more of their wages into savings rather than spending any spare cash. While this is a good policy for consumers, who will have a savings buffer in place to protect them against unemployment down the line, it is less positive for businesses and shops which desperately need people to spend if they are to see the recession out in good health.

Desirie Lea, a partner at Morris & Co chartered accountants, says it is not yet clear whether the latest stats are the top of the cycle - or the tipping point.

"A large proportion of the redundancies taking place are arising from small and medium-sized companies, which are getting little, if any, help from the government," Lea adds. "The government urgently needs to provide grants, funding and incentives to companies to keep as many people employed as possible, which would avoid the financial costs of high unemployment, the personal costs and speed up the economic recovery.

"The more people that are out of work, the longer the economic recovery will take."

Trevor Williams, chief economist at Lloyds TSB Corporate Markets, is also concerned about what the future holds: “These figures are only a reflection of the past six to nine months. We know that the UK’s economy contracted sharply at the back end of last year, and has continued slow this year. I expect to see at least 70,000 – 120,000 people lose their jobs each month for the next nine months.”

Williams believes that construction, consumer services industries and the retail sector will be the hardest hit.

What is the government doing?

Tony McNulty, the employment minister, admits the latest figures are disappointing but says the government is doing all it can to stem the flow of job losses. "We will not stop giving people help and support to get back into work as quickly as we can," he adds.

Business leaders from the likes of Sainsbury's, the Royal Mail, Whitbread, Centrica, National Express and Travelodge will meet with Gordon Brown at Downing Street today at the first meeting of the National Employment Partnership.

It is hoped that the companies will commit to helping 200,000 people back to work over the next year.

James Purnell, secretary of state for work and pensions, says: "We know times are tough and we need to continue doing all we can to support people who lose their jobs find another as quickly as possible, preventing the long-term unemployment - which has so scarred communities in the past - from taking root."

Measures proposed by the NEP include introducing more apprenticeships and advertising more vacancies through Jobcentre Plus.

A recent study by the Trades Union Congress (TUC) has revealed that, while unemployment in the UK was lower than the European average, it was now increasing twice as fast as the average across Europe.

According to the TUC’s figures, the UK's unemployment rate stands at 6.1%, compared with the European average of 7.7%. However between December 2007 and October 2008 the UK's suffered the third sharpest rise in unemployment (1%), behind Ireland (2.7%) and Spain (4.4%).