The Economy: Long-term jobless total close to 1 million: Analysts see unemployment fall as promising sign in battle against inflation - Labour says figures are 'massaged'

THE NUMBER of people unemployed and claiming benefit for a year or more dropped by more than 40,000 in the three months to July, taking the Department of Employment's estimate of long- term unemployment to within a whisker of 1 million for the first time since late 1992.

The number of people unemployed for a year or more was 1,004,300. The number without a job for six months or more dropped even more sharply, falling by 91,300 in the three months to July, to 1,511,300. This was six times the fall in the previous three months, but smaller than that seen in the autumn of last year.

Michael Portillo, Secretary of State for Employment, said the fall of 176,500 over the past year in the number of people unemployed for six months or more was 'particularly pleasing'. But Labour warned that the Government was 'massaging' the jobless figures, although officials at the DoE deny this.

Economists believe the fall bodes well for the Government's hopes of keeping inflation under control. The long-term unemployed become demoralised and less attractive to employers, so they do not restrain pay settlements and price increases by competing effectively with existing employees. Separate figures from the DoE show that labour costs are not yet putting upward pressure on inflation. Settlements remain low and manufacturers are stepping up production while shedding jobs.

Manufacturers spent 1.1 per cent less on wages and salaries to produce each unit of their output in June than they did a year earlier, although companies in the United States and Germany are cutting unit labour costs even faster.

Output per employee - productivity - in manufacturing was 5.5 per cent higher than a year earlier, reflecting sharply rising production and the shedding of more than 40,000 jobs in the past year.

'Direct labour costs account for 44 per cent of manufacturers' overall costs and indirectly a considerable proportion of other costs,' Adam Cole, economist at City firm James Capel, said. He added that against a background of sharply falling labour costs, the recent rise in the price of their raw materials - 8 per cent of their total costs - did not yet raise worries about inflation.

Workers' average earnings were 3.75 per cent higher in June than a year earlier, the same annual rate of increase as in the previous two months. This figure was well received in the City as evidence that pay settlements are not yet putting upward pressure on price rises. Earnings have been growing at an annual rate of 3.5 per cent in each of the past three months in service industries, while earnings growth in manufacturing slowed from

4.5 per cent in the year to May to 4.25 per cent in the year to June.

Earnings growth is subdued because pay settlements are still averaging between 2 and 3 per cent and because big bonus payments in the City were concentrated in the beginning of the year.

In June, 450,000 workers in building and civil engineering agreed on a pay rise of 2.4 per cent, having had their pay frozen last year. About 65,000 British Rail drivers settled at 2.5 per cent, up from 1.5 per cent last year.

The biggest major settlement in June was the 4.9 per cent agreed by the Agricultural Wages Board for 184,530 farm workers, up from 2.75 per cent in 1993. This reflects the fear that the board, the last remaining setter of statutory minimum wages in Britain, might soon be abolished. Next month's figures will include a 2.2 per cent settlement for 125,000 civil servants in support and clerical grades, up from the 1.5 per cent public-sector pay norm imposed last year.

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