UK unemployment fell to its lowest level in nearly half a century in the first quarter of 2022, with almost a million people switching jobs as the number of vacancies rose to a new high of 1.3mn.

The Office for National Statistics said the jobless rate stood at 3.7 per cent in the three months to March, the lowest level since 1974, with fewer people out of work than there were job openings for the first time on record. The number of people unemployed for between six and 12 months also fell to its lowest level on record, the ONS said.

However, the UK’s workforce remains smaller than it was before the pandemic, because of the large numbers who say they are neither working nor job-seeking. The employment rate rose to 75.7 per cent, 0.1 percentage points up on the quarter but still 0.9 percentage points lower than in early 2020, with a further rise in the rate of economic inactivity adding to the strains on a tight labour market.

The figures underscore the scale of the challenge facing the Bank of England as it tries to rein in soaring inflation, while workers seek wage rises to ease the squeeze on the value of their earnings. Andrew Bailey, the central bank governor, said on Monday that people on high earnings should “think and reflect” before asking for big pay rises this year, because of the risk that rapid wage growth would feed further increases in consumer prices, keeping inflation high for longer.

The ONS said annual growth in regular weekly earnings rose to 4.2 per cent in the three months to March, equivalent to a real terms fall of 1.2 per cent — a figure that was flattered by comparison with a period in which many employees were furloughed during lockdown. 

However, total pay including bonuses was still outpacing inflation, with annual growth of 7 per cent — or 1.4 per cent in real terms. This overall growth masked big differences between sectors, however, with nominal total pay up 10.7 per cent year on year in finance and business services, but just 1.4 per cent — equivalent to a big real terms fall — in the public sector. 

Hannah Slaughter, economist at the Resolution Foundation, said some people were taking advantage of a tight jobs market to move roles or secure retention bonuses, but that “for the vast majority of the workforce, the labour market may feel far less hot”.

Analysts said the data would strengthen the case for the Bank of England’s monetary policy committee to raise the interest rate again next month, but that the red-hot labour market could soon start to cool as the squeeze on household incomes deepened. 

Samuel Tombs, at the consultancy Pantheon Macroeconomics, said there was “no need for the MPC to panic about wage growth”, arguing that people were likely to rejoin the workforce or work longer hours to combat financial pressures, while an unusually big cohort of students was about to graduate and immigration was picking up. 

Yael Selfin, chief economist at KPMG, said that while bonuses were high in some sectors, the figures suggested “that inflation is not yet embedded in wage bargaining expectations”.

Chancellor Rishi Sunak said it was “reassuring that fewer people are out of work than was previously feared”, adding that tax cuts and other government support were “helping them keep more of their hard-earned money”.