Scottish economic bulletin: February 2026

Labour Market

The labour market continued to loosen in Q4 2025, with the number of payrolled employees continuing its downward trend alongside slower earnings growth.

Employment, Unemployment, and Inactivity

• Unemployment remained low in Scotland in the final quarter of 2025, but indicators continue to point towards loosening conditions with falls in the number of payrolled employees, weaker pay growth and business surveys continuing to indicate a fall in staffing levels at the start of the year.
• The Labour Force Survey (LFS) shows Scotland’s unemployment rate remained low in the 3‑months to November at 3.7% (UK: 5.1%), and fell 0.2 percentage points (p.p) over the quarter and 0.1 percentage points over the year (UK: +0.7 p.p).^[12]
• Scotland’s Claimant Count unemployment rate (3.5%) also remains low relative to the UK as a whole (4.4%), albeit that the number of claimants of unemployment related benefits rose 1.1% (1,100) in December to 104,400, its highest level since May. Over the past year however, the claimant count has fallen by 3.1% (3,300).^[13],[14]

• The LFS for the three months to November also shows that alongside the fall in the unemployment rate over the quarter, the employment rate rose 0.4 p.p to 74.7% and the inactivity rate fell by 0.3 p.p to 22.3%. Compared to last year, both indicators remain stronger with the employment rate up 0.6 p.p and the inactivity rate down by 0.5 p.p.
• However, Pay as you Earn (PAYE) Real Time Information data indicates that the number of payrolled employees in Scotland is currently falling back from its recent peak of 2.46 million in July 2024. Latest data for December shows that payrolled employees has fallen by 0.4% (8,700) over the past year to 2.45 million, albeit remained largely unchanged over the month.^[15]

• This trend over the past year is similar across most other parts of the UK with the number of payrolled employees in Scotland at its lowest level since February 2023.

Recruitment Activity

• Business surveys indicate that demand for labour and recruitment activity remained relatively subdued in the fourth quarter of 2025 with this pattern continuing into the start of the new year, and has been impacted by factors including cost pressures, weakness in new business orders growth, and elevated economic uncertainty.
• The Scottish Business Monitor reported that firms employment levels continued to fall during Q4 2025 and at an accelerated rate with the employment indicator net balance falling to -13.9%.
• While there were indications of stabilisation in December, most recent business survey data indicates that this didn’t continue into January, with the RBS Growth Tracker employment indicator falling to 48.9, (50 indicates stable employment levels) and its lowest level since August 2025.^[16]

• However, looking ahead, BICS data indicates that the share of businesses expecting employee numbers to increase rose from 8.8% in January to 16.3% in February, its highest share since July 2025, while the share of businesses expecting employee numbers to decrease fell from 14.0% to 13.3% for February. 61.4% of business expect employee numbers to remain unchanged in February.

Earnings

• Earnings growth remained robust in 2025, however latest data indicates the pace of growth slowed notably in the final quarter of the year. However, this slow-down is not necessarily concerning, with real earnings growth remaining positive, and may also signal a lessening of inflationary pressures.
• Nominal median monthly PAYE pay in Scotland (£2,580) grew by 4.2% on an annual basis in December, up from 1.4% annual growth in November when the growth rate was at its lowest since June 2020. However, the pace of growth was lower than the relatively high average annual growth rate in 2025 of 5.2%. In real terms, adjusting for annual inflation of 3.4% in December, earnings grew by 0.9% (UK: 0.7%), notably below the average annual growth rate of 1.7% in 2025.^[17]

• Looking ahead, earnings growth is expected to moderate further in 2026 reflecting reduced inflationary pressures and a looser labour market. At a UK level, the recent Bank of England pay survey indicates that the average pay settlement will fall from 4% in 2025 to 3.4% in 2026.^[18]