The number of UK workers on payrolls dropped by 56,000 last month and has fallen by 813,000 since March 2020 due to the impact of the pandemic, according to the Office for National Statistics (ONS).
But showing signs of improvement, it said the unemployment rate surprisingly fell to 5% in January, from 5.1% in December.
“The labour market is showing some signs of resilience in the face of covid-19,” said Tej Parikh, chief economist at the Institute of Directors.
“The pandemic has led to an unprecedented rise in job losses, but with continued support from the furlough scheme and the economy now gradually reopening, worst case scenarios are now slowly coming off the table.”
The unemployment rate measures the number of economically active people who are out of work and actively seeking new employment.
In January, the ONS estimated 1.7 million people were unemployed.
The claimant count — a more experimental measure that includes all people claiming work-related benefits — rose by 3.3% to 2.7 million.
Sam Becket, ONS head of economic statistics, said payroll numbers pointed to a continued rebound in jobs in February, although the economy still has 700,000 fewer jobs than prior to the pandemic.
“Of the decrease since then, almost two-thirds has been among the under-25s, over half has been in hospitality, and almost a third has been in London,” Becket said.
Despite the dip in headline unemployment, the jobless rate remains near a five-year high.
The unemployment rate has risen by 1.1% over the last 12 months.
The number of people out of work for six months or more has also risen.
While unemployment remains high, economists have in recent months become more optimistic about the path of the jobs market.
At his budget earlier this month, Sunak said the peak of unemployment was expected to be lower than previously feared thanks to the rapid rollout of Covid-19 vaccines and extensive state support for the economy.
Darren Morgan, at the ONS, added: “The latest figures suggest that the jobs market has been broadly stable in recent months after the major shock of last spring.
“The number of people on payroll fell slightly in March after a few months of growth.
“There are, though, over 800,000 fewer employees than before the pandemic struck, and with around five million people employed but still on furlough, the labour market remains subdued.
“However, with the prospect of businesses reopening, there was a marked rise in job vacancies in March, especially in sectors such as hospitality.”
But the British Chambers of Commerce (BCC) warned unemployment is on track to hit its peak at the end of the year as furlough is closed off.
“The latest data confirms that the UK labour market remains subdued,” head of economics, Suren Thiru, said.
“While there was a marginal fall in the unemployment rate, the squeeze on activity from ongoing restrictions helped drive a decline in payroll employment in March.
“Unemployment remains on course to peak towards the end of 2021, once the furlough scheme expires and those who stopped job hunting during the pandemic look to return to the workforce as restrictions ease.”
Paul Craig at Quilter Investors: said: “At 5.0% the unemployment rate remains artificially suppressed by furlough and there are fears that unemployment could easily be more than double what the stats tell us.”
But he said the UK is in a sweet spot with the vaccination roll out on track and job adverts improving in line with eased restrictions.
Craig said combined, this could help stabilise employment in the coming months.
“The positive news is that online job adverts are returning to pre-pandemic levels as the economy begins its tentative steps to normality, and it appears better times are on the horizon.
“The UK is approaching somewhat of a sweet spot with the successful vaccine rollout allowing the economic reopening, and this is coinciding at a time when the stimulus taps remain turned on, giving people hope that better times are right around the corner.”
UK chancellor Rishi Sunak said Tuesday’s report showed Covid-19 had “caused one of the largest labour market shocks this country has ever faced.”
But he insisted the government has saved 11.2million roles since last March.
“We have taken decisive action with a £352bn ($487bn) package of support,” Sunak said in a statement.
“The continued success of the vaccine rollout provides us with hope for the future, and through our Plan for Jobs, we will continue to support people throughout the months to come.”
“Protecting jobs and the economy has been my main focus since this pandemic began – through the furlough scheme alone we have protected 11.2 million jobs.
“As we progress on our roadmap to recovery I will continue to put people at the heart of the Government’s response through our Plan for Jobs – supporting and creating jobs across the country.”
Minister for Employment Mims Davies MP added: “Another drop in unemployment, vacancies on the rise, and over half a million people joining payrolls in the last month is welcome news as we continue on our roadmap to recovery with key sectors of our economy reopening.
“This is still a challenging time, but right across the country our Plan for Jobs is helping people of all ages to get back on their feet and giving employers the confidence to recruit as we push to build back better.”