Annex B: Labour Market Challenges
The table below sets out some of the main labour market challenges - the last four being mainly linked to the economic crisis brought on by the COVID-19 pandemic. These are in the first column in the framework and the following gives a summary description of these challenges. These are just some of the challenges facing the labour market at this time.
Table 3: Main Labour Market Challenges
Pre-2020 economic crisis
Fair Work Opportunities and Quality of Work
Fair Work is the ambition to improve the quality of work in Scotland so that in Scotland work offers effective voice, respect, security, opportunity and fulfilment. Beyond headline labour market indicators, the quality of work in our economy can be informed by sector trends, pay levels, whether someone works full time or part time, opportunities for progression, levels of job satisfaction and other metrics. Pre-COVID-19, economic improvements were not being felt across the board, leading to some concerns about the quality of work in our labour market.
Insecure employment, such as zero-hours contracts, remain a feature of work. In Scotland, 2.6% of people in employment, 69,000 were in zero hour contracts in Oct-Dec 2019. This had decreased from 72,000 (2.7% of people in employment) in the same period in 2018.
Hours based underemployment (percentage of people in employment aged 16+ who want to work more hours) was 7.1% in 2019, still higher than the rate pre-2008 recession (6.7% in 2007).
In the year to December 2019 Scotland had 116,000 temporary workers. This is about 4-5% of the total workforce and is down slightly from previous years.
400,000 employees (16.9% of people in employment) in Scotland earned less than the real Living Wage (£9.00) in 2019, decreasing from 473,000 in 2018. That said, the proportion of employees earning less than the real Living Wage has fallen from 20.1% in 2016 to 16.9% in 2019.
Women are still more likely to earn less than the living wage than men; workers are more likely to earn below the living wage if they work part-time; the largest proportion of workers earning less than the living wage is in the 18-24 age group.
The gender pay gap for all employees (full-time and part-time) decreasing from 15% in 2018 to 14.3% in 2019, although the gender pay gap for full-time employees in Scotland increased from 5.6 % in 2018 to 7.1% in 2019.
Earnings below the living wage
In Scotland, 400,000 employees (16.9 per cent of people in employment) earned less than the Living Wage (£9.00) in 2019, decreasing from 473,000 in 2018. The proportion of employees earning less than the living Wage remained relatively constant between 2012 and 2016, decreasing to 16.9 per cent in 2019.
Graduates in non-graduate employment
Pre-COVID-19 there was some indication of low labour market demand in some areas. For example, the 2016 figure for graduate skills underutilisation ranges from 40.8% of graduates (five or more years after graduating) working in non-graduate roles based on the Annual Population Survey, compared to 28% of first degree leavers entering 'non-professional' roles based on Higher Education Statistics Agency surveys. 
In addition, skills under-utilisation is high. The proportion of establishments with at least one employee with skills and qualifications more advanced than required for their current job role was 35% in 2017 compared to 32% in 2015.
Inequalities between regions and groups
Pre-COVID-19, there were persistent gender, disability and ethnicity related gaps in labour market outcomes, and these inequalities can originate long before people enter the labour market.
There were also large variations in labour market outcomes across regions of Scotland and these have remained largely unchanged over time. In 2019, there was a gap of 19.8 percentage points between the local authorities with the highest and lowest employment rates (Orkney Islands, 87.1%; and Glasgow City 67.3%)
Labour market shortages due to lack of EU labour
There are 219,000 (non-UK) EU nationals living in the UK, 4.1% of the population. Brexit and the end of freedom of movement puts this supply of labour at risk. We know that 77% of EU citizens are in employment compared with an overall rate for Scotland of 73% and EU citizens account for over 5% of all employment in Scotland. Rural areas are also more reliant on EEA workers. At the sectoral level, over 30,000 EU citizens are employed in distribution, hotels and restaurants in Scotland, and EU citizens make up over 7% of employees in the manufacturing sector. EU citizens also make a vital contribution to NHS Scotland where they fill skilled vacancies in hard-to recruit specialisms and geographical regions.
In addition, there are an estimated 60,000 seasonal migrant workers in Scotland which accounts for 2% of the total workforce in Scotland. More than two-fifths of non-agricultural seasonal migrant workers originated from Poland and almost a third (31%) from Romania (FAI, 2020). Internal SG calculations suggest a monthly figure of 40,000 people would be working in seasonal employment for the months of May to August 2020. As many workers would be due to start in May and June, they would not be covered by the Job Retention Scheme.
Low in-work training
The percentage of employees who reported receiving job-related training in the last 3 months has been decreasing over time. In 2009, slightly over a quarter of workers (27.6 per cent) received job related training in the last 3 months, decreasing to 23.7 per cent in 2019. Though increasing slightly from 22.5 per cent in 2018.
Sectoral skill shortages
Vacancies that employers find hard-to-fill due to applicants lacking relevant skills, qualifications or experience are termed 'skill-shortage vacancies. Skill shortages can have widespread negative impacts through reduced productivity, increased operating costs, delays to new product/services development and difficulties introducing technological change. Just 3% of employers with skill shortages said they had no impact.
In 2017, 6% of Scottish workplaces had a skill shortage vacancy (a steady rise from 3% in 2011) i.e. experiencing external recruitment difficulties due to low number of applicants with the required skills, qualifications or experience. Skill-shortage vacancies accounted for 22% of all vacancies in the UK in 2017, relatively unchanged from 2015.
Skill shortages were particularly prevalent in certain sectors. In Construction, over a third of all vacancies were reported to be hard to fill for skills-related reasons. The density of skill-shortage vacancies has increased since 2015 in Primary Sector and Utilities, Arts and Other Services, Education, and Public Administration.
Weak demand for labour, including graduates
Due to the restrictions on economic activity there will be medium term unemployment, but also as businesses lose their ability to maintain operation, unemployment could continue to rise. Over the past few years, Scotland has had near historic high levels of employment and low unemployment. The latest modelling provides a projection of unemployment rising to over 10% by the end of 2020. Assuming this analysis is right, then we can presume there will be weak demand for labour in the coming period.
Prior to the current economic crisis, there was already evidence pointing to potentially weak demand for graduates. Of the approximate 1 million jobs expected to be demanded in our economy between 2019-2029, 92% are expected to be "replacement" demand - where jobs are vacated through retirement, change of occupation or migration and are required to be re-filled.
This level of churn in the labour market has implications for skills demand but also supply. Where replacement demand is higher (e.g. professional occupations, elementary occupations and sales and customer service occupations), the skills associated with those jobs would be expected to be in greatest demand. Of all qualification grades, SCQF 7-10 (HNC to Honours degree level) is expected to make up around half of this labour market churn, followed by SCQF 5 (National 5) making up around one quarter.
Disproportionate impacts on groups in the labour market, including young people
Equalities groups were disproportionately impacted during previous recessions and there are indications that certain groups in our labour market could be disproportionately impacted again. Drawing on multiple evidence sources the following groups are anticipated to be hardest hit financially by COVID-19 - younger people, women, minority ethnic people, disabled people, those living in more deprived areas, and lone parents. 
Although we should treat it with caution due to small sample sizes, unemployment amongst 16 to 24 year olds was 13.1% for the period February to April 2020, an increase of 7.1 percentage points in comparison to the same period in 2019 and evidence from previous crises indicates that those entering the labour market from education during a downturn may suffer reduced pay and employment prospects lasting several years. In addition, young people are particularly vulnerable to unemployment in the current crisis due to their concentration in the most exposed sectors of the economy, with 26% of men under 25 and 39% of women under 25 working in sectors which shut down as part of the response to COVID-19.
Change in Business Models
It is possible that adaptations made by some employers to allow them to continue to operate during the COVID-19 crisis may be permanently incorporated into business models. A major shift towards remote working has taken place with survey responses suggesting that 41.7% of the workforce of businesses across the UK continuing to trade are working remotely. A greater instance of remote working in the long term may result in reduced demand for employment associated with the servicing of business premises as well as in the transport sector.
Volume of redundancies
Survey data indicates that the Job Retention Scheme has been relatively successful in reducing the number of redundancies that may otherwise have occurred. Businesses that are continuing to trade or that have temporarily paused trading report that less than 1% of their workforce across the UK has been made redundant. The large portion of the workforce currently furloughed, however, implies that there is potential for large numbers of redundancies to occur when the scheme is curtailed. Survey responses indicate that the portion of the workforce currently furloughed across the UK is 29.8%.
A recession resulting from the COVID-19 pandemic and the measures taken to combat it could have effects which persist over a prolonged period. These may include mismatches between skills demanded by employers and those possessed by newly unemployed workers; and loss of productive capacity due to business failures. The most pessimistic recovery scenario modelled by the Scottish Government assumes a supply shock sustained over the medium term as a result of these structural issues.
The Monthly Business Turnover Index gives an indication of which sectors in Scotland have experienced the highest loss of revenue and may therefore be at greater risk of loss of productive capacity through business failure. While almost all the industries had a net balance of less than 50 in March (indicating the majority of businesses having lower turnover than the previous year) Accommodation and Food Services had the most alarming proportion of businesses with a lower revenue with a net balance of just 8. Businesses in the Accommodation and Food Services Industry at the UK level were also most likely to have either no cash reserves or cash reserves sufficient to last less than on month.
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