The number of Britons claiming unemployment benefit unexpectedly fell in August by the largest amount since June 2010 as companies created new jobs, raising hopes that a stabilising labour market will help pave the way for an economic recovery.
Britain's economy has been mired in recession since late 2011 according to official figures, but looks set to post some growth in the third quarter.
Employment rose to the highest level in over four years, providing rare relief for the government, which is under fire for its tough austerity programme and under pressure to kick start a meaningful recovery.
The number of people claiming jobless benefit fell by 15,000 last month, the Office for National Statistics (ONS) said, beating even the most optimistic economists' forecast.
The London Olympics may have helped to create jobs and bring unemployment down, the ONS said.
"There are some positive and encouraging signs there," said Employment Minister Mark Hoban.
"But there are also some challenges too," he told BBC TV, citing the problem of youth unemployment.
Most economists took the labour market report as another indication that the economy may be slowly moving out of recession.
"With euro zone break-up fears fading and the U.S. set to unveil further stimulus tomorrow, the hope is that we will start to see more optimism in the corporate sector on economic prospects, which can lead to a further strengthening of the UK's jobs market," ING economist James Knightley said.
Others sounded a note of caution.
"Delving below the surface reveals a less impressive picture," Capital Economics economist Samuel Tombs said. "Most of the rise in employment was driven by growing self- and part-time, rather than full-time employment," he said.
The number of people without a job on the wider ILO measure ticked down by 7,000 in the three months through July to 2.592 million compared to the February-April period.
However, the number was higher than the 2.56 million unemployed reported for the April through June period. The jobless rate stood at 8.1 percent, compared with forecasts for a reading of 8.0 percent.
PUBLIC SECTOR CUTS
The resilience in Britain's labour market has been a puzzle for most economists and the Bank of England, who are wondering how an economy in recession can create jobs.
Recent surveys have indicated that firms are planning to step up hiring in the months to come despite an uncertain economic outlook.
The government is hoping that private companies create enough new jobs to balance the job cuts in the public sector, which are part of the tough austerity programme.
The ONS said the number of public sector employees fell by 235,000 in the second quarter to 5.66 million, the lowest since 2001, although most of that drop was due to education organisations being transferred to the private sector.
Average weekly earnings including bonuses grew by 1.5 percent. Analysts had forecast a rise of 1.6 percent. Excluding bonuses, pay rose by 1.9 percent.
The sluggish wage increases show little domestic inflation pressures, providing some comfort for the Bank, which is about half-way through its latest 50 billion pounds worth of bond purchases to stimulate the economy.
However, with inflation running still well above the BoE's 2 percent target, households' spending power is dwindling, making a vigorous rebound in consumer spending unlikely. (Additional reporting by Olesya Dmitracova; editing by Jason Neely)