Brexit: implications for the Scottish labour market

David Eiser, Fraser of Allander Institute

Forecasting future change in demographics and the labour market is almost certainly a mugs game. The ONS’ 1996-based population projections for Scotland forecast the Scottish population would decline from 5.1 million to 5 million by 2016. What actually happened is that population decline went into reverse in 2004, and now stands at close to 5.4 million.

More recently, the impact of the 2008-9 Great Recession on the labour market in subsequent years turned out to be quite different from what had been forecast at the time. Based on the experience of previous recessions, the general assumption at the start of the recession was that employment would fall by more than output, and take longer to recover pre-recession levels. But expectations were confounded – unlike previous recessions, employment fell by less than output and recovered relatively quickly. But the implication was unprecedented falls in labour productivity and wages (median weekly wage fell by 7% in Scotland in real terms).

Within this context, forecasting the effects of Brexit on the Scottish labour market is almost certainly impossible, particularly when we still have no idea what sort of arrangement the currently non-existent UK government might try to strike with the EU. But the following observations can be made:

First, the UK economy has now entered what is likely to be a prolonged period of uncertainty. Firms have already begun to postpone hiring and investment decisions. The fall in the pound may benefit exporters in the short-run, but the effect is quite likely to be outweighed by the impact of higher inflation in reducing household consumption. Recession is a distinct possibility. Precisely how this economic slowdown will affect total employment, the composition of employment, and wages, remains to be seen. But it will not be positive.

Second, the young tend to do particularly badly during downturns. The youth unemployment rate in Scotland increased from 12% in pre-recession 2007 to 22% in 2011. It is currently 14%. A multitude of studies now exist showing that prolonged or repeated spells of unemployment whilst young have long-term consequences on long term employment and earnings prospects, as well as on psychological well-being.

Third, EU nationals play an important role in the Scottish economy. In 2015 some 80,000 EU nationals (aged 16+) were living in Scotland according to the Labour Force Survey (which is likely to underestimate the ‘true’ number). The employment rate of EU nationals (74%) is significantly higher than that of UK-born (59%), (and around half of the EU nationals in Scotland who are ‘economically inactive’ are studying at HE institutions). Net migration from EU countries is likely to fall both due to the uncertainty around their future status, but more particularly in response to a decline in general economic prospects. This may place some economic sectors in Scotland under particular strain.

Fourth, the big weakness currently in the labour market is not in terms of headline figures for employment or unemployment which are both strong in a historic context. The major weaknesses lie beneath the surface of these headline numbers and can be summarised in one word: insecurity. This manifests itself in the rise in temporary work, involuntary part-time work, zero-hours contracts, and insecure forms of contracted-out self-employment. Brexit – and the subsequent economic and political uncertainty – can only increase the sense of insecurity that many workers already feel.

I hope that the tenor of these observations turns out to have looked hopelessly pessimistic in the months and years to come. But it is hard to see how the effects of Brexit on the Scottish labour market can be anything other than negative, at least in the short-term.