Labour Market, Scottish Economy

Weekly update: what’s the state of the Scottish labour market?

This week the ONS has published their first sub-UK labour force survey (LFS)-based statistics since September 2023. In October, the ONS decided to withdraw a number of estimates due to concerns about the unrepresentative nature of the LFS, which had seen large falls in response rates.

The ONS had been due to reweight the LFS in October 2023. This is a statistical technique which involves changing the weights given to observations of subsets of the sample to ensure that they are more reflective of the population as a whole.

Although originally postponed, the ONS has now been able to reweight the LFS estimates, which means that sub-UK breakdowns are once again available. However, the reweighted figures are only available from quarter 3 of 2022 onwards, and so are not directly comparable with previous ones.

And while the reweighting can help with making results more representative, it doesn’t solve the volatility issues arising from the small sample size in the LFS. The ONS openly acknowledge this, of course – but it’s important for commentators such as us to highlight this and to not over-interpret small changes.

The Scottish labour market appears to have weakened during 2023

Unemployment was estimated to be 4.5% in the final quarter of 2023. And while that is not necessarily concerningly high, it represents a large increase (1.2 percentage points) relative to the first quarter of the year, and which would suggest more slack in the labour market than previously thought.

This corroborates the estimates published earlier in 2023 prior to the statistics being withdrawn, and which already showed a jump in unemployment between quarters 1 and 2.

Chart: Unemployment rate in Scotland

Source: ONS

There has been some volatility in estimates of inactivity, but most of the consistent movement appears to be on the employment rate, which has fallen by 1.6 percentage points year-on-year. Of particular note on inactivity is short-term sickness, which has dropped back to the historical range in the latest data after being elevated from mid-2021 to early 2023; and a 10% year-on-year fall in the number of people under the age of 65 who have retired.

It is important to not overstate how large these changes are – the LFS has a relatively small sample size in Scotland, which means that estimates can be particularly volatile. The regional labour market summary indicates that Scotland’s 4.5% unemployment rate is the second highest unemployment rate of all UK regions, behind only the East Midlands. But the sampling variability release indicates wide bounds for the Scottish estimates: the 95% confidence interval ranges from 3.1% to 5.9%.

Regional estimates will always have wider bounds due to lower sample sizes. As a comparison, the UK-wide 95% confidence interval ranges between 3.4% and 4.2%. And this does not mean that we should ignore the 4.5% estimate – but rather, we should caveat any conclusions based on it. Other indicators also point to a weakening labour market in Scotland, which give some credence to the unemployment data.

Sectoral analysis shows a large fall in the number of retail jobs in Scotland

Data on workforce jobs (WFJ) is lagged slightly relative to the just the LFS, but it is augments it in ways that make it less prone to the response rate issues that the LFS has suffered from. But low sample sizes can still be an issue, especially at a regional level, and therefore averaging across quarters can be helpful to abstract from some of the noise in the data.

Doing so highlights a few movements across sectors that are noteworthy. There were 29,000 fewer wholesale and retail jobs in the 12 months to September 2023 than in the 12 months to September 2022 – an 8% fall, and by far the largest contributor to the 44,000 fall in jobs in that period across Scotland. Administrative and support services (18,000, or 8%) and manufacturing (11,000, or 6%) were the next largest falls in jobs on a sectoral basis. On the other hand, professional and scientific services jobs grew by 9% (18,000), as did accommodation and food services.

It is worth noting that these movements are significantly larger than those suggested by HMRC’s real-time information (RTI) data, even if in almost all cases they match the directional of travel of the WFJ data. While HMRC’s data only includes employees, WFJ suggests employee jobs are responsible for most of the movement, so it is not yet clear how the two data sources will reconcile.

As far as we can tell, pay growth is slowing across almost all sectors in Scotland

The sub-UK LFS-based average weekly earnings release remains suspended, so any data on Scottish earnings growth remains a partial picture. The RTI data year-on-year growth in pay of 6.4% in December – above current rates of inflation, but well below the high of 10.2% and 10.8% seen in March and April, respectively.

The slowdown in pay growth is pretty broad-based, with manufacturing, electricity and gas supply, real estate, health, information and communications and education seeing large decelerations – all of them of around 6 percentage points or more.

But as we highlighted in our economic commentary released last week, data on pay growth shows a divergence across sectors. The latest data suggests pay growth continues to be very strong in education (7% year-on-year in the last three months of 2023) and health (11%), both of which have a very large public sector component. On the other hand, production sectors have seen nominal growth ranging from -0.5% (electricity and gas supply) to 3.9% (water supply) – all of them below the rate of inflation.

What we don’t know

Clearly the publication of sub-UK splits of labour market data is welcome. Data should always be available for considered decision-making, and never is that truer than when economic conditions are as difficult as they are right now.

Nevertheless, we have at best a partial view of the labour market in Scotland. It seems clear that unemployment has risen significantly over the past 12 months, and that pay growth is slowing. But we know next to nothing about self-employment earnings, and we are also unclear to what extent some of sectors are being reshaped.


João is Deputy Director and Senior Knowledge Exchange Fellow at the Fraser of Allander Institute. Previously, he was a Senior Fiscal Analyst at the Office for Budget Responsibility, where he led on analysis of long-term sustainability of the UK's public finances and on the effect of economic developments and fiscal policy on the UK's medium-term outlook.