20th August 2026
I have been looking at the latest Scottish Government labour market figures, and I think they contain a warning that is easy to miss if we concentrate only on the headline numbers.
Scotland still has more than two million people in employment, wages are rising and the claimant count actually fell slightly in July. On the surface, there is nothing that looks particularly alarming.
But underneath those figures, the direction of travel is becoming less comfortable.
The Scottish Government's latest Labour Market Trends report, published on 18 August, brings together the latest HMRC payroll information, claimant-count figures and the Office for National Statistics Labour Force Survey. It covers payroll and claimant data through July and employment and unemployment estimates for the April-to-June quarter.
The first figure that caught my attention was the number of people actually on company payrolls.
There were an estimated 2.44 million payrolled employees in Scotland in July, but that was 6,000 fewer than a year earlier, a fall of 0.2%. The decline is not dramatic, but it continues a trend which has been developing since the number of Scottish payrolled employees peaked in December 2023.
That is something I would not ignore.
It suggests that businesses are becoming more cautious about employment, even though the overall number of jobs remains well above pre-pandemic levels.
There is, however, some good news for those who remain in work.
Median monthly pay for Scottish employees reached £2,687 in July, according to the early HMRC figures. That represents a 4.3% increase over the year, slightly ahead of the 4.2% increase recorded across the UK.
In other words, people who have jobs are still seeing reasonably healthy increases in their pay.
That is particularly significant given the renewed pressure on household finances from energy, fuel and food prices. A 4.3% increase in earnings gives working households some protection, although whether it is enough depends very much on how their individual household costs have changed.
There is another important point here.
The Scottish Government says that annual growth in median pay has generally been trending downwards since August 2025. So although 4.3% looks quite strong, the direction of wage growth is not particularly encouraging.
That could become important over the next year.
If inflation remains elevated because of energy and fuel costs while wage growth continues to slow, the real-terms improvement in household incomes could disappear surprisingly quickly.
The unemployment figures provide the more worrying part of the story.
Scotland's unemployment rate was estimated at 5.1% between April and June, compared with 4.9% for the UK as a whole.
More significantly, Scotland's unemployment rate had increased by 1.4 percentage points over the year.
The number of unemployed people was estimated at around 140,000, an increase of 39,000 over the year.
I would normally regard that as a fairly significant warning.
But there is an important qualification.
The Labour Force Survey has experienced problems with data collection this year, and the Scottish Government warns that the latest estimates are subject to greater imputation. The ONS has said the problem appears to have had little impact on the UK headline figures, but more information is needed to assess its impact on Scotland.
The Scottish Government therefore advises caution in interpreting the short-term movements.
I think that is the right approach.
It would be wrong to look at the 5.1% unemployment figure and announce that Scotland's labour market is suddenly collapsing. The evidence simply isn't strong enough for that conclusion.
But equally, I don't think we should dismiss the movement.
There are other indicators pointing in the same general direction.
The employment rate for people aged 16 to 64 was 74.0%, down 1.1 percentage points over the year. That compares with 75.1% across the UK.
At the same time, Scotland's economic inactivity rate was 22.0%, compared with 20.9% for the UK.
So Scotland has a lower proportion of working-age people in employment and a higher proportion economically inactive than the UK average.
That creates a particularly important challenge for Scotland.
We often talk about unemployment as though it is the only measure of whether people are participating in the economy. It isn't.
Someone who has lost their job and is actively looking for another one is counted as unemployed.
Someone who has left the labour market altogether is economically inactive.
That distinction matters because Scotland has a substantial economically inactive population. Getting more people into work could therefore be just as important as reducing unemployment.
There is some encouraging evidence on that front. Economic inactivity fell slightly over the year and was down 0.7 percentage points over the latest quarter.
But at 22%, Scotland remains above the UK rate.
The claimant-count figures are somewhat more reassuring.
There were 106,800 people in Scotland in the claimant count in July, 1,000 fewer than in June. However, the number was still 4,600 higher than a year earlier, representing a 4.5% increase.
The Scottish claimant-count rate was 3.6%, well below the UK figure of 4.3%.
So we have an interesting contradiction.
The claimant count suggests that Scotland's position remains relatively favourable compared with the UK, yet the Labour Force Survey suggests unemployment has risen significantly.
That is precisely why I think we need to look at several indicators rather than pick whichever figure best supports an argument.
There is also a lesson here for Scottish businesses.
Employers are still paying more for labour. Median pay is rising by more than 4% a year, and the National Living Wage has also increased substantially.
At the same time, businesses are facing higher energy, transport, insurance and other operating costs.
That makes the decision to employ another person more expensive.
For a large company, an additional employee may still make perfect commercial sense. For a small business operating on tight margins, the calculation can be very different.
This is particularly important in areas such as retail, hospitality, tourism, care and other sectors where labour accounts for a large proportion of operating costs.
The temptation for businesses is to become cautious.
Instead of taking on another employee, they may ask existing staff to work more hours. Instead of expanding premises, they may postpone the decision. Instead of investing, they may wait to see what happens.
Those individual decisions may make perfect sense from a business perspective.
But if enough businesses make them at the same time, the effect can be felt across the wider economy.
That is why I think the falling payroll numbers deserve more attention than they have perhaps received.
We are not looking at a labour-market crisis.
Far from it.
There are still millions of people working in Scotland, wages are rising and the claimant count is considerably lower than in the UK as a whole.
But I think we are seeing the first signs that the exceptionally tight labour market that followed the pandemic is gradually disappearing.
That could eventually have an effect on wages.
For several years, employers struggled to recruit and retain staff. Workers had greater bargaining power and businesses had to offer higher wages to attract people.
If unemployment rises and vacancies weaken, that balance changes.
Employers gain more choice.
Employees have less.
And that could be particularly significant given the other pressures building up on household finances.
I have been looking at energy prices, food costs and housing costs in recent articles, and this labour-market report adds another piece to that picture.
A household can cope with higher prices if its income is rising strongly.
It can cope with weaker wage growth if prices are stable.
It becomes much more difficult when wage growth starts slowing at the same time as essential household costs are rising.
That is the combination I will be watching.
For Scotland, the latest figures don't yet tell us that the economy is heading into recession. They do, however, suggest that the labour market is losing some of its strength.
The most striking figure for me is perhaps not the 5.1% unemployment rate. It is the combination of fewer people on payrolls, a lower employment rate and unemployment rising over the year.
Against that, we have the positive fact that people who remain in work are still receiving reasonably strong pay increases.
So Scotland's labour market is currently giving us two very different messages.
Those who have work are, on average, doing reasonably well. Those trying to find work are facing a more difficult market.
That distinction could become increasingly important over the next twelve months.
If employment stabilises and wages continue rising, the current deterioration may prove to be little more than a soft patch.
But if payroll employment continues to fall, unemployment continues to rise and wage growth continues to slow, then the labour market could become another source of pressure on Scottish households and businesses just as the cost of energy, food and housing is beginning to rise again.
For businesses in places such as Caithness, there is an additional question.
We have spent years worrying about the shortage of workers and the difficulty of recruiting people to rural areas. A weaker labour market might appear, at first glance, to solve some of that problem.
I am not convinced it will.
The real challenge is not simply having people available for work. It is having people with the right skills, living in the right place, with access to affordable housing and transport, and employers able to offer wages that make taking the job worthwhile.
That is a much more complicated problem than the unemployment rate alone can tell us.
And for that reason, I think the latest Scottish labour-market figures deserve watching rather than dismissing.
The Scottish economy is not in trouble.
But the labour market is no longer looking quite as strong as it did.
And in the current environment of higher energy prices, renewed inflationary pressure and rising household costs, that may become increasingly important for both Scottish businesses and the people who depend on them for their incomes.
Source
https://www.gov.scot/publications/labour-market-trends-august-2026/