Job search: a robust labour market masks some sobering forecasts for the economy

Written by Tom Freeman on 20 June 2018 in Inside Politics

Economic forecasting has consistently shown that Scotland’s employment challenges set it apart from other countries in the UK

Job search queue - Image credit: Holyrood

When the Office for National Statistics releases its employment figures, the response from Scottish ministers is remarkably consistent, whether the news is good or bad.

When the figures published in December showed an 8,000 rise in those out of a job, Employability Minister Jamie Hepburn said: “Our overall unemployment rate remains lower than the UK’s.”

In May, a 6,000 drop was reported. Hepburn’s take then was: “Once more, we continue to outperform the UK on employment and unemployment rates for young people.”

The labour market in Scotland has been robust. There are 10,000 more people in work than a year ago and 19,000 fewer people economically active.

But while comparisons with the rest of the United Kingdom seem to have become the inevitable response, economic forecasting has consistently shown that Scotland’s employment challenges set it apart from other countries in the UK.

These unique challenges were laid bare by the recent report of the Scottish Government’s own Scottish Fiscal Commission (SFC), which forecast slower growth for the Scottish economy than previous estimates.

GDP growth will remain under one per cent until at least 2022-23, it said.

The report had already been upstaged, however. While politicians and commentators focused their attention on former SNP MSP Andrew Wilson’s Sustainable Growth Commission, with its prospectus for Scottish independence, the grim forecasting of the SFC blended into the background.

But the details of the SFC’s predictions of weak growth contained some sobering reflections on Scotland’s jobs market.

After labour productivity fell 1.9 per cent in real terms in 2017, productivity growth for 2018 was revised down from 0.5 per cent to 0.2 per cent, while real wages are now anticipated to fall by 0.5 per cent during 2018.

In other words, without improvements in labour productivity, firms will struggle to increase wages of workers.

As the Fraser of Allander Institute put it in its labour market report: “Perhaps the biggest economic narrative of the past decade, not just in Scotland but in the UK and a number of advanced economies, is what has happened to productivity and in particular labour productivity.”

While Scotland has remained behind UK-wide labour productivity, it has done some catching up, the report added.

“Nevertheless, UK labour productivity remains poor and matching the UK is not much of an achievement. Indeed, Scotland remains locked in the 3rd quartile of OECD countries for productivity.”

However, unlike the UK as a whole, Scotland’s working-age population is set to shrink further, while at the same time, the overall population is set to rise. This pressure on the public purse through a lower tax take will coincide with further stagnation in wages.

This contrasts with a return to modest real wage growth at the UK level.

While uncertainty around Brexit is a major factor in cautious economic forecasts, it does not explain the poorer picture facing Scotland than the rest of the UK.

The Scottish Government acknowledged the SFC figures were “challenging” for the economy, but in fact, they are also grim reading for anyone of working age. For while the Scottish Government and its agency, Skills Development Scotland, have worked to identify which sectors are experiencing skills gaps and look for ways to attract graduates into them, the SFC forecasts suggest there simply will not be enough people of a working age to go round.

While fierce competition for graduates may push up wages for those with the right skills, unless Scotland can grow its working-age population, those skills gaps may just be passed on to other sectors.

Speaking to the Finance and Constitution Committee, SFC chair Dame Susan Rice said: “Employment is very strong – in fact, it is growing – and unemployment is decreasing.

“There seem to be jobs out there for people who are willing and able to work. It is conceivable that, if employment is even fuller, wages may rise, as there will be pressure there.

“The downside of having high employment and lowering unemployment is to do with capacity. If there was a lot of investment and a need for more new jobs, which would ultimately improve wage growth, people would be needed to take those jobs.”

Trade unions have called for Scotland to have its own industrial strategy to reflect the country’s challenges.

Scottish Labour leader Richard Leonard provided the political impetus for the idea.

The MSP recently said: “In our industrial strategy, we want to show people that through a new approach to long-term investment by unleashing innovation and the ingenuity of working people, we can herald a renaissance in our manufacturing industries.”

In fact, Universities Scotland, the Scottish Council for Development and Industry (SCDI) and partners such as the Scottish Funding Council have already been engaging with industry to try and lobby for a good deal for Scotland from the forthcoming UK industrial strategy, which is being consulted on this year.

It is expected to include actions on specific industries.

Launching the White Paper, UK Government business secretary Greg Clark said: “Scotland has huge economic strengths, including in financial services, life sciences, higher education and research, quantum technologies and advanced manufacturing.

“We believe that a really effective industrial strategy should build on those capabilities and help create new ones.”

Meanwhile, we are halfway through the Scottish Government’s seven-year youth employment strategy, ‘Developing the Young Workforce’, which grew out of a review led by oil and gas tycoon Sir Ian Wood, which recommended vocational learning be given the same respect and status as academia, and the barriers between school, college, university and the workplace be broken down.

After 2017’s Enterprise and Skills Review, a strategic board was established to align and coordinate the relevant agencies: Scottish Enterprise, Highlands and Islands Enterprise, Skills Development Scotland, the Scottish Funding Council and the proposed enterprise agency for the south of Scotland.

It is early days, and it is not yet clear whether the focus of the board will be plugging specific current skills gaps or a more population-level approach which takes in transferable skills.

Whatever priorities emerge, as the SFC report has highlighted, a focus on new young graduates and apprentices will not be enough to plug skills gaps and address the demographic challenges.

If the economy is to be more flexible and unpredictable, how can Scotland ensure its workforce is too?

“In an increasingly dynamic economy, people must be able to learn and develop new skills throughout their lives. The notion of the job for life is long gone, but so too is the notion of the single career,” Susan Stewart, Director of the Open University in Scotland, told Holyrood.

“Scotland is a small country and needs the talents of all its people to succeed. That means people in rural and urban settings, of all ages, with and without disabilities, and those for whom education has previously been a difficult experience as well as those who’ve found it more straightforward.

“This matters in terms of fairness, inclusion and access but with changing demographics and fewer young people to do the jobs of the future, it’s also an economic necessity.”

The SFC told MSPs it had revised down
its economic forecasts because of new detail on the impact of real wages on the economy as a whole.

Commissioner John Ireland said: “The main thing that is driving the analysis is that we spent some time looking at how real wages have moved in relation to the standard things that drive real wages in economic theory, which are productivity and labour market slack.

“We have done work to look at how real wages respond to labour market slack or the extent of unemployment, and to productivity changes. We have also thought about whether there are other brakes on the evolution of real wages.”

Meanwhile, politicians persist with comparisons with our southern neighbours.

Shadow Finance Secretary Murdo Fraser challenged Finance Secretary Derek Mackay on the fact Scotland has diverged from the UK.

“The contrast between the UK Government’s progress and the dismal performance of the Scottish economy relative to that in the rest of the UK after 11 years of this Scottish Government could not be more stark,” he said.

“Last year, our economy grew at half the rate of that in the rest of the UK, and more slowly than the economies of every single European Union country.”

Mackay, meanwhile, lay the blame for Scotland’s productivity gap firmly at the feet of the country’s union with England and Wales.

“Here is a wee secret: I support Scottish independence because I know what it could unlock for Scotland’s economy, our people and our democracy,” he told MSPs. “Short of having independence, the Scottish Government will do the best that we can with the tools at our disposal.

“The Scottish Fiscal Commission’s substantial and exhaustive evidence shows how many of the barriers to our economic potential are in the hands of the UK Government, which is totally undermining our economy through A, B, C: austerity, Brexit and the cap on migration. That lends weight to the argument that we should have independence.”

Whether the rest of the UK provides the backup or is to blame, Scotland still faces a population and productivity pickle. The question is what our politicians want to do about it.

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