The total officially out of work rose to 2.57 million in the three months to August, while unemployment among the under-25s hit a record 991,000.
At prime minister's questions, Ed Miliband accused David Cameron of being more interested in saving Liam Fox than in stemming the tide of joblessness. "On the day of the worst figures in 17 years, the prime minister is fighting to save the job of the defence secretary, but he's doing nothing to save the jobs of hundreds of thousands of people up and down this country," said the Labour leader.
"It is one rule if you're in the cabinet, it is another rule for everyone else."
The number of people out of work is at its highest since 1994, while the rate has jumped to 8.1%. Cameron conceded it was "very disappointing," but refused to swerve from the Treasury's deficit reduction plan.
"I accept we've got to do more to get our economy moving, to get jobs for our people, but we mustn't abandon the plan that has given us record low interest rates."
For those workers who have a job, there is no relief from the squeeze on their living standards, according to the Office for National Statistics. Average wages, excluding bonuses, are rising at 1.8% – less than half the pace that inflation is rising.
The Bank of England announced £75bn of quantitative easing last week to try to boost demand and restore confidence. But Charlie Bean, its deputy governor, said it would be at least 2012 before life got any easier. "This year has been a particularly bad one," he told the Guardian. "Inflation has been high; earnings growth has been slow; private workers have had a couple of years of pay freezes.
"As we go into next year, as inflation comes down - and hopefully there will be room for some slightly higher pay growth - I would hope that households would start to think, 'well, it's not as bad as last year: the squeeze is easing' ".
However, City economists warned that the jobless figures are just the start of an inevitable deterioration in the labour market. "This shouldn't really come as a surprise – the economy is growing at half the pace it needs to in order to keep unemployment stable. That isn't going to change any time soon – in fact it is probably going to get worse," said Alan Clarke, of Scotia Capital.
James Carrick, of Legal and General Investment Management, said the Treasury's cuts were responsible for pushing the economy to the brink of recession. "Despite announcing the harshest austerity plan since the second world war, the government has been predicting a steady economic expansion," he said. "This implied the biggest private sector boom ever." Instead, said Carrick, businesses were cutting back; recession was now a serious risk.
Young people continued to bear the brunt of the labour market downturn. Their unemployment rate – at 21.3%, more than double the UK rate as a whole – is also the highest since such records began in 1992. Reflecting government cuts, the number of public sector employees fell 111,000 over the three months to June. The private sector failed to fulfil the government's hopes for it to pick up the slack, with just 41,000 more people joining the company payrolls in the same period.
Paul Kenny, general secretary of the GMB union, said: "The Tories and Lib Dems' big gamble that private sector growth would create enough jobs to compensate for their cuts in public sector jobs has not come off. In the worst international recession for 80 years, the government itself is creating unemployment with 250,000 public sector posts already gone, and still more to come."
Employment minister Chris Grayling blamed global problems. He also said that, of the near-million youth unemployed, 270,000 were students looking for a job but still in education, leaving the "real number" at 721,000. "It's clear we are seeing the effect of the international economic crisis on the UK labour market. That's why last week we announced the right to buy housing scheme to support growth, and today we're offering more support for jobseekers as sector-based work academies come on stream, combining real training, work experience and a guaranteed interview."
The recruitment group, Manpower, said work academies alone, though "badly needed", would not solve the problem.
"Jobseekers need to be more flexible about what jobs they're applying for but employers too need to look beyond traditional criteria when selecting applicants. Young people have valuable soft skills making them a teachable fit for many of the technical skills required in each job," said Mark Cahill, Manpower UK's managing director.
For those employed, workloads are up. Average weekly hours rose in the three months to August to 31.5, up 0.4 from the three months to May 2011.
"Those still in work are working longer hours," said Charles Levy, senior economist at the Work Foundation. Even if the 178,000 people lost from the workplace were all doing half-time jobs, that was still a big number of hours to lose, he added. "Everyone still in work has expanded their hours to make up for that."
Many workers are trapped in jobs they would rather leave, according to recruitment company Hays, which published a survey yesterday suggesting two-thirds of Britain's workers would move on if they could find a better job.
"This shows the dual impact of the recent challenging climate and just how stretched and unhappy many workers are – even if they are fortunate enough to be employed," said Charles Logan, director at Hays.
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