Scottish Labour Market Trends [November 2017]

Fraser of Allander Institute, Scottish Centre for Employment Research; (2017) Scottish Labour Market Trends [November 2017]. University of Strathclyde, Glasgow.

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Employment and unemployment rates in Scotland continue to look healthy. On the face of it, current levels of labour market activity should be consistent with an economy that is in rather good fettle. Yet overall economic conditions are more fragile. Economic growth in Scotland over the year to June was just 0.5%. There are clearly good reasons why having people in work, even if economic conditions are challenging, is a positive outcome. Evidence points to numerous long-term benefits of being in employment, not just financially, but also from a wider health and socio-economic perspective. But there is a downside. The mechanism through which these two facts – robust labour market performance and slow economic growth – are reconciled is through weak productivity growth. The most recent data – up to 2015 – had been showing Scotland catching up with the UK in terms of productivity (although current trends suggest that Scotland is likely to slip back a little during 2016 and 2017). Whilst welcome, this does need to be put in context. Firstly, UK productivity has been weak for some time, a situation referred to as the ‘productivity puzzle’. John Sutherland’s guest article explores some dimensions of this in more detail. Secondly, the productivity gap between Scotland and the top quartile of OECD countries remains similar to what it was in 2007. Back then, the Scottish Government had a target to eliminate this gap by 2017. What we also show is that a key reason that Scotland has caught up with the UK in terms of productivity has less to do with a fundamental improvement in efficiency and more to do with the faster pace of jobs growth in the UK labour market. Remember, labour productivity is a measure of how much output (GDP) is produced in an economy per hour worked or per job – i.e. it is a ratio of the growth in output relative to the growth in jobs/hours worked. Therefore, productivity can improve for two reasons. Either we are effectively producing more with the same number of people working (or working the same hours); or we are producing the same output with fewer people working (or working fewer hours). What we see in the data is that Scotland’s performance relative to the UK can be explained by the UK economy creating more jobs and opportunities to work more hours than the Scottish economy has in recent years – not just overall but also at a faster rate than growth in the UK economy. It is this which has led productivity in the UK to grow more slowly than in Scotland (and therefore for Scotland to catch-up with the UK).