By William Schomberg and Christina Fincher
LONDON (Reuters) - The number of people in Britain claiming jobless benefits had its biggest fall in more than 16 years last month but the jobless rate held steady, underscoring the Bank of England's message that unemployment is likely to fall only slowly.
Data released on Wednesday also showed wages falling further behind inflation, something likely to be seized on by the opposition Labour party which has made living standards a central theme of its 2015 election campaign.
But there were signs that Britain's economic recovery was feeding into the labour market, as the number of people claiming jobless benefits fell by a much bigger-than-expected 41,700 in September, the biggest monthly fall since June 1997.
August's claimant count was also revised to show a drop of 41,600, a fall of 9,000 more than first reported, the Office for National Statistics said.
The unemployment rate was 7.7 percent in the June-August period, unchanged from May-July and in line with most forecasts in a Reuters poll.
The Bank of England, hoping to give Britain's economic recovery a boost, said in August it will not consider raising interest rates before unemployment falls to 7 percent. The BoE forecasts that will not happen before the third quarter of 2016.
Investors largely expect unemployment to fall much faster and many have put money on a rate hike in early 2015.
Sterling briefly rose to its highest level in a week against the dollar and the euro following the data.
Some economists said the Bank of England's timeframe for unemployment to fall to 7 percent - which hinges on companies getting existing workers to increase output rather than on hiring new staff - did not appear to be under serious threat.
"The unemployment number will move slowly, that much is clear," said Peter Dixon at Commerzbank.
He said the solid 155,000 increase in the number of people in employment was simply keeping pace with an increase in the labour force.
The percentage of people aged 16-64 who are in work rose to 71.7 percent, the highest since the three months to February 2009 and up from 71.4 percent in the March-to-May period this year, the ONS said.
Even as Britain's labour market picks up, many people in work are not seeing an improvement in their living standards.
Average weekly earnings growth including bonuses slowed sharply to 0.7 percent in the three months to August compared with a year earlier. Excluding bonuses, pay grew 0.8 percent.
By contrast, inflation in September was 2.7 percent, having exceeded the BoE's 2 percent target since December 2009 and persistently outstripped wage growth.
For public sector workers, the picture was even worse. Their pay fell 0.5 percent in the three months to August, the first ever fall on a three-monthly basis, the ONS said.
Forecasting the path of unemployment is complicated by uncertainties over how big Britain's labour market will be.
More older people are working than in recent years and the lifting of restrictions on migrant workers from Romania and Bulgaria from January could also push up the number of people in work or seeking a job. Another uncertainty is the level of job cuts in the public sector.
(Additional reporting by Olesya Dmitracova; Editing by Catherine Evans)
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