Scottish Economic Insights: April 2025

The Labour Market Continues to Perform Strongly with Robust Earnings Growth though Recruitment Activity has Softened.

Employment and Unemployment

Scotland’s labour market has continued to perform strongly through the final quarter of 2024 and into the start of 2025 with low levels of unemployment and relatively stable levels of employment. However, latest data continues to indicate that labour market conditions have loosened with slower recruitment activity, though earnings growth remains relatively strong.

Scotland’s headline unemployment rate has remained low through the turn of the year at 4.2%, while the claimant count unemployment rate fell slightly in March to 3.7% with c.109,000 claimants. Over the past year, the claimant count rate has increased slightly from 3.6% in March 2024 with the number of claimants rising by c. 3,700 over the period. This is relatively low compared to the peak in 2020 during the pandemic (7.5%) however the increase over the past year is consistent with wider labour market indicators which suggest that conditions have slightly loosened.

For example, the number of payrolled employees in Scotland fell by 2,500 (0.1%) over the year to 2.45 million in March. However, the fall largely occurred in the final quarter of 2024 and the start of 2025 having increased slightly in the earlier part of 2024.

Box 3: Alternative Labour Market Indicators

The Annual Population Survey (APS) and Labour Force Survey (LFS) are important sources for the Scottish Government to produce labour market statistics, covering key metrics such as employment, unemployment and economic inactivity. Since the COVID-19 pandemic, the declining response rates for these surveys has led to concerns around the reliability of official estimates of the labour market in Scotland and the UK, and the loss of Accredited Official Statistics status for LFS and APS-based outputs.^[16],[17]

Scottish Government labour market statisticians have completed the first phase of their Quality Assessment of the ONS LFS and APS data for Sc otland which explores the quality of the latest LFS and APS data and summarises what this means for Labour Market statistics in Scotland.^[18]

The review finds the LFS and APS estimates for Scotland show clear signs of increased volatility and uncertainty as a result of, but not exclusively due to, the COVID-19 pandemic and changes to the surveys during this time. The ONS have made progress in mitigating these issues. However, the review highlights the importance of transparency and communicating to users concerns with the quality of the estimates. The Scottish Government continues to assess the quality of the LFS and APS data to determine what can be published, and work is ongoing to explore options for improving the Scottish Labour Market data to meet user needs as effectively as possible.

Following concerns with the quality of the official labour market estimates, the Resolution Foundation published a paper in November 2024 outlining an alternative measure of the employment rate in the UK using administrative data sources.^[19] This suggested that the level of employment in the UK may actually be higher than suggested by the LFS. As can be seen in Figure 4, replicating this approach for Scotland suggests that the findings may also apply to Scotland.

Source: Scottish Government analysis, using ONS data and Resolution Foundation methodology

This finding also implies that the unemployment rate or inactivity rate (or both) are potentially lower than the LFS suggests, which is important in understanding how best policy can support the labour market.

This same result for Scotland was also found recently by the Scottish Health Equity Research Unit (SHERU), who in February published similar analysis following the Resolution Foundation methodology.^[20]

If employment is indeed higher than suggested by the LFS, either unemployment or inactivity must be lower, though this cannot be explicitly seen from the administrative data. Given that there are significantly more people inactive than unemployed, the Resolution Foundation suggests the majority of their extra employment estimate is due to a fall in the level of inactivity.

Applying this same methodology to Scotland suggests that, in contrast to the LFS data, inactivity may have fallen back to pre-COVID levels.

Given the importance of this issue, it is imperative that we fully understand the quality of labour market statistics to determine the scale of inactivity and the reasons for being inactive. Following Phase One of the Scottish Government’s Quality Assessment of the ONS LFS and APS data for Scotland, the Scottish Government will be exploring alternative data options to supplement the main labour market data sources, investigating administrative and alternative data sources that might provide additional information for Scotland.

Recruitment Activity

Some business survey indicators also show evidence of gradual easing in the labour market and particularly over recent months. The RBS Growth Tracker employment indicator fell below the 50 no change level in December for the first time since the start of 2023, albeit marginally, and has continued to indicate that businesses are slightly reducing their headcount for a fourth consecutive month in March (49.8).^[21]

Similarly, responses to the Business Insights and Conditions Survey (BICS) suggests that businesses have reduced their employment intentions over the past year with the share of businesses expecting to decrease the number of employees rising from 5.2% in April 2024 to 14.1% in April 2025. This is highest in the Accommodation and Food Services sector (25.1%).^[22]

There has also generally been a corresponding fall since mid-2024 in the share of businesses expecting to increase their employee numbers. This trend has recently reversed since the start of the year with the share of businesses expecting to increase employee numbers rising to 19% with a notable increase in recent months in the information and communication sector (35.8%).

This mixed picture in recent months has also been reflected in online vacancies data which shows that the number of new online job adverts fell and stabilised over 2023 and 2024 from particularly elevated levels in 2022 back to similar levels in 2019 prior to the pandemic. Nonetheless, the number of new job adverts increased in January to 46,135 and is 17% higher than in January 2024 indicating an improvement in recruitment intentions.^[23]

Looking ahead, the outlook for the labour market remains strong however there is uncertainty over the demand for staff, both in respect of the current weaknesses indicated in economic activity and the impacts of the increase in employer National Insurance Contributions. The Fraser of Allander’s Scottish Business Monitor for Q1 2025 showed that almost half of respondents (47%) reported that they have reduced hiring and/or employee expansion plans after NICs changes.^[24]

The Scottish Fiscal Commission (SFC) expect Scotland’s unemployment rate to rise very gradually towards 4.0% in 2027. However the OBR revised up its UK unemployment forecast for 2025 from 4.1% to 4.5% in March, reflecting the current spare capacity in the economy, before it is forecast to fall back to its trend rate of 4.1%.^{[25], [26]}

Earnings

Despite the slight loosening in labour market conditions, earnings growth has remained relatively strong resulting in the real terms earning growth in 2024 continuing into the new year, albeit at a slower pace following the recent pick-up in inflation.

Nominal median monthly earnings, when not accounting for inflation, increased by 5.3% annually in March, down marginally from 5.4% in February and notably lower than growth rates during 2024, which peaked at 7.4% in November. Combined with the upward trend in inflation in recent months (2.6% in March) annual real earnings growth in Scotland was 2.6% in March, up marginally from 2.5% in February.^[27]

Nominal earnings growth at a GB level moderated across both the public and private sectors during 2024, however has picked up more strongly in the private sector than the public sector in recent months. The growth rate in private sector average weekly earnings was 5.9% in the year to December-February while in the public sector, the annual pay growth rate rose to 5.7%.^[28]

Looking ahead, there are a range of demand and supply side factors that are expected to impact on earnings growth including the expected increase in inflation, the increase in employers National Insurance Contributions, the continued loosening in labour market conditions and the general increase in economic uncertainty.

In December, the SFC forecast Scottish earnings to grow by 3.7% in nominal terms in 2025-26, and by 1.5% over the same period in real terms. Real earnings growth is then forecast to be more moderate in subsequent years, with slower nominal earnings growth expected to be the driver of the forecasted slowdown. More recently in March, the OBR revised up their real terms forecast for UK average earnings growth in 2025 to 1.4% as wage settlement expectations continued to hold up, and forecast it to slow to 0.1% in 2026.

The Bank of England Decision Maker’s Panel (DMP) data shows that firms reported annual wage growth of 5.0% in the three months to March, marginally down from February, with expected year-ahead wage growth lower at 3.9%.^[29] Further intelligence from the Bank of England’s Agents’ summary of business conditions indicate that average pay rises for 2025 are between 3.5% and 4.0%.^[30]