Just Transition Commission: background report

3. Labour Market

Summary of Evidence: Labour Market

Projections to 2030

The growth in employment for Scotland by 2028 is projected at around 85,000 jobs compared to 2018.

However, as a result of people retiring, or leaving occupations or sectors for other reasons, replacement demand is projected to amount to 900,000 job opportunities over the course of the decade.

Comparing 2028 with 2018 in terms of projected employment by sector:

• Significant growth is projected for jobs in private sector services and construction.
• Manufacturing jobs are projected to decline by over 26,000, with 16,000 fewer in public administration and defence. Agriculture and mining are projected to continue their long-term decline in employment terms.

In terms of occupations:

• Strong growth is projected for: business and public service professionals; business and public service associate professionals; skilled construction and building trades; elementary clerical and service occupations.
• Decline is anticipated in relation to protective service occupations; administrative occupations; secretarial and related occupations; skilled metal and electrical trades; process, plant and machine operatives; and elementary occupations in trades, plant and store.

Labour supply is compromised in volume terms by the long term decline in the working age (16-64) population, although there may be some mitigation due to rising employment rates in the 65+ age group. Projections on net migration are largely conditional on the outcome of the BREXIT process, and governmental migration policy.

Scenarios Beyond 2030

The forward look on the labour market is dominated by the potential impacts of digitalisation on the nature of work. This has been happening for some time, but there is no certainty on the time path for the emergence of more far-reaching impacts.

Detailed research suggests that jobs across the full spectrum from currently very low skilled to very high skilled will be impacted significantly.

There is considerable uncertainty over the impact on the total volume of employment, although historically major technological advances transforming work have been consistent with growing employment.

Policy Context

3.1. The labour market is central to economic development strategy in Scotland as articulated in Scotland's Economic Strategy in 2015^[13]. The labour market is at the heart of driving two high-level strategic goals:

• Increasing productivity and sustainable economic growth.
• Increasing labour market participation and reducing inequalities, to make this growth as inclusive as possible.

3.2. Scotland's Economic Strategy places a great emphasis on inclusive growth, and the labour market is viewed as a critical domain linking growth and inclusivity.

3.3. The Scottish Government's 2016 Labour Market Strategy^[14] set out five key labour market outcomes.

• A skilled, productive and engaged workforce capable of meeting the needs of employers.
• An economy that supports a sustainable working population, and that can retain and attract new talent to meet our wider economic and social ambitions.
• High employment and low unemployment.
• Equality of opportunity to access work and to progress, to ensure everyone is able to maximise their potential.
• Fulfilling, secure and well–paid jobs where employees' contributions are encouraged, respected and valued

3.4. The last of these outcomes reflects a policy approach by the Scottish government which places great weight on Fair Work, defined as: 'Work that offers effective voice, opportunity, security, fulfilment and respect; that balances rights and responsibilities of employers and workers, and that can generate benefits for individuals, organisations, and society'.

3.5. Another relevant key policy drive in more recent years is the focus on tackling inequalities. This has involved legislation, guidance to public bodies and a range of action plans. Two major current concerns, closely linked to the labour market, are:

• Halving the disability employment gap.
• Closing the gender pay gap.

3.6. Actions Plans to address each of these goals have been produced by the Scottish Government.

Evidence Base: The Current Position

3.7. This section reviews the current labour market position based on trends over the most recently available 5-year period – to June 2018 unless footnoted otherwise. Over this period, the total number employed rose by 133,000 to 2,540,000 – of which 48% were female.

Employment, Unemployment and Economic Inactivity Rates

• The employment rate – measured as percentage of working age people in employment - rose from 74.4% to 78.5% for males, and from 66.6% to 70.7% of females. These are very high levels by historical standards, but there are big variations by region with the West of Scotland^[15] underperforming.
• Employment rates for disabled people rose^[16] from 42.4% to 48.4%, but the latest figure is well below the 81.5% employment rate for people without a disability.
• Employment rates for minority ethnic groups rose marginally from 57.8% to 57.9%, compared to the growth from 70.9% to 75.4% for the 'white' population.
• In terms of age, whereas the number of 35-49 year-olds in employment fell by 4.2%, there was a growth of 17.4% in both the number of 50-64 year-olds and 65+ in employment.
• Unemployment rates for males have fallen from 9.2% to 4.7%, and for females from 6.7% to 3.5%. Again the West of Scotland underperforms other Scottish regions.
• Economic inactivity rates show no improvement, with a fall from 23.4% to 22.2%. Economic inactivity rates are much higher in the West of Scotland, attributed to the higher incidences of disability and long-term health conditions.

Employment by Sector

• In 2018 the largest sectors of employment were Human Health and Social Work Activities, and Wholesale and Retail, each with in excess of 380,000 employees.
• Over the previous 5 years the strongest growth, 10% or more, was in Real Estate Activities, and Administrative and Support Service Activities.
• There was a substantial decline (-43%) in Agriculture, Forestry and Fishing, but also in Manufacturing (-21%). The combined job loss in these two traditional sectors amounted to 35,000 over the five years. Agriculture, Forestry and Fishing now account for only 1.3% of all jobs, and Manufacturing 6.7%.

Employment by Occupation

• The most growth was displayed in caring leisure and other service occupations (12.7%); process, plant and machine operatives (11.4%); and professional occupations (10.7%). The numbers in professional occupations grew by over 10,000 per annum over the period.
• Relatively small percentage declines were experienced in administrative and secretarial occupations, and sales and customer service operations.
• Growth was particularly rapid in more specialist occupational areas, exceeding 20% for science, research, engineering and related professionals; and health and social care associate professionals.

Labour Supply

3.8. The figures for the number of EU migrants employed in Scotland for the last three years are shown below. Despite forecasts that numbers would decline following the referendum in June 2016, the evidence shows a different picture. The numbers grew very strongly during 2016/17 – and continued to rise during 2017/18. This growth is despite the reduced value of remittances to home economies due to the fall in sterling relative to the euro, allied with very strong growth and rising earnings in many of the Eastern European economies.

Figure 3.1: Employment of Non-UK EU Nationals

	EU Nationals Employed	% of Total Workforce
2015/16	110, 000	4.4%
2016/17	135, 000	5.4%
2017/18	143, 000	5.7%

Source: Annual Population Survey, ONS

3.9. Over 50% of EU migrants in employment in Scotland in 2017/18 were employed in Aberdeen City and Aberdeenshire, or Edinburgh city region. These are the two tightest labour markets in Scotland, so this finding is unsurprising.

3.10. In terms of sectoral and occupational reliance on non-UK EU labour, and focusing on situations where 10% or more workers are EU migrants:

• The Accommodation and Food Services sector employ nearly 15% of their workforce from EU migrants, but there are no others with a 10% exposure.
• For occupations, there are five with a 10+% reliance on EU workers - textiles, printing and other skilled trades; process, plant and machine operatives; elementary trades and related occupations; elementary administration and services; and leisure, travel, related personal services.

Earnings, Skills Shortages and Deficits

3.11. Earnings and recruitment and skills issues tend to be related at some level.

• Average (median) weekly earnings^[17] increased by 10.5%. However, taking account of price inflation, average real earnings declined over this period.
• Hard to fill vacancies as a percentage of all vacancies rose from 33% to 39%.
• Skill shortage vacancies as a percentage of hard to fill vacancies declined from 74% to 60%.
• The percentage of establishments with the skills gap - defined as staff with less than adequate competence levels for the job role – fell from 19% to 16%.

3.12. The evidence here is mixed on the indicators is derived from the UK Employer Skills Survey 2017. The narrative appears to be that vacancies are becoming hard to fill due to insufficient numbers of applicants, rather than the skill sets of those who do apply.

Projections to 2030

3.13. There are no projections available beyond 2028. The 2028 projections used here were commissioned by SDS from Oxford Economics to update the more comprehensive study published in November 2017^[18].

Employment

3.14. The headline employment projections for Scotland relative to the UK are captured in the chart below. This shows a much calmer pattern of annual change compared to the recession and post-recession years. As we move closer to 2028, projected annual employment growth is only marginally above zero. The net growth in employment for Scotland by 2028 is projected at around 85,000 compared to 2018.

Figure 3.2: Annual % Change in Employment – Scotland and UK

3.15. Although not charted above, the highest rate of jobs growth is projected in Edinburgh and Glasgow. The net job growth for the two cities combined is close to 68,000 jobs, over 80% of the jobs growth for Scotland as a whole. Employment is projected to decline modestly in North and South Ayrshire, Eilean Siar, Argyll & Bute, Moray, Dumfries & Galloway and Aberdeen City.

Total Employment Requirements

3.16. The expected net growth in jobs is, however, extremely modest compared to the number of job openings projected for the next 10 years as a result of people leaving Scotland, retiring from the labour market, leaving employment for other reasons or moving out specific occupations. This replacement demand is projected to amount to 900,000 job openings over the coming decade.

Figure 3.3: Projections for Total Employment Requirements, 2018-28

3.17. Within this overall total:

• The largest demand is projected for elementary clerical and service occupations, with 150,000 job openings. Sales occupations and teaching and research professional are both around the 100,000 mark.
• For many of occupations there will be a requirement to fill in excess of 40,000 jobs over the 10 years, including challenging recruitment and retention areas such as caring and personal service occupations.

Employment by Sector

• Strong growth is projected for private sector services - Administrative and Support Services; Professional, Scientific and Technical Activities; - and Construction. All these sectors are anticipated to add well excess of 20,000 jobs – and over 30,000 jobs in the case of Administrative and Support Services.
• Growth of employment in excess of 10,000 is projected for Wholesale and Retail; Accommodation and Food Services; Human Health and Social Work; and Arts, Entertainment and Recreation.
• Manufacturing is projected to decline by over 26,000 jobs, with 16,000 fewer in Public Administration and Defence. Agriculture and mining are projected to continue their long-term decline as sources of employment.

Figure 3.4: Employment Projections by Sector 2018-28, Scotland

Employment by Occupation

• Strong growth – 10,000 additional jobs or more – is projected for business and public service professionals; business and public service associate professionals; skilled construction and building trades; elementary clerical and service occupations.
• Growth in excess of 5,000 additional jobs is projected for corporate managers; leisure and other personal service occupations; science and technology professionals; culture, media and sports occupations; and caring and personal service occupations.
• Occupational decline is anticipated in relation to protective service occupations; administrative occupations; secretarial and related occupations; skilled metal and electrical trades; process, plant and machine operatives; and elementary occupations in trades, plant and store.

Figure 3.5: Employment Projections by Occupation 2018-28, Scotland

Labour Supply

3.18. A key factor in supplying the Scottish labour market has been the continued growth of EU migrants beyond the date of the EU referendum. At this point there is no certainty as to whether or not BREXIT will take place, and if it does take place there is no certainty as to the future relationship between the UK and the EU. In the circumstances, projections on the supply of EU labour are pure speculation. Additionally, although some direction has been indicated in relation to UK migration policy, no firm decisions have been made, and will not be made until BREXIT has been put to bed one way or the other.

3.19. Figure 3.6 provides a simple picture of projected population change which shows the working age population more or less flat lining from 2019, but then declining from 2029. What is clear is that Scotland's underlying demographic position, explored in depth in the Population Domain paper, is not supportive of a growing employment base using the 16-64 definition of the working age population.

3.20. However, the 16-64 definition of working age needs to be challenged. Average retirement ages are rising due to pension changes in the state sector and pension defaults in the private sector, and this is already reflected in increasing employment rates in the 50-64, 65-74 and 75+ age bands. There are in excess of 600,000 in the 65-74 age band. The population projections suggest a shortfall of around 150,000 in terms of labour supply defining working age as 16-64. If 25% of the 65-74s were employed in 2040 the gap could be covered, and in fact nearly 90,000 of 65-74s are currently employed. It is likely, however, that these older workers would prefer to supply fewer hours per week than those of prime age.

Figure 3.6: Projected Scottish Population Change (Indexed) by Age Group, 2014-39

Source: NRS, 2016

3.21. Additionally, Scotland has currently around 100,000 unemployed and over 200,000 working age people classified as economically inactive due to disability and/or health issues. With more occupational tasks become digitally enhanced or enabled it may become easier for some of those further from the labour market to enter and sustain employment.

Issues with Projections

3.22. Statistical projections for employment are in common use throughout the UK. The limitations of these approaches are well known, and there are great dangers in using these at the disaggregated geographical scale, such as a local authority area, as in some instances this comes close to projecting the future of a small number of major employers rather than the local economy. Projections are particularly fragile at times of great uncertainty in terms of the global economy, or major regional economies within this. Currently there are major issues with China's debt burden, a potential major trade war – and of course BREXIT. Additionally, the nature of employment is set to change radically – and perhaps rapidly, although this is less certain – due to the impact of digitalisation. This is discussed below.

Beyond 2030

3.23. Digitalisation is already changing face of the economy and labour market across the developed world. Digitalisation will have a significant impact on the nature of existing jobs, and this will also involve job losses – but at the same time digitalisation will create many new jobs. The issues and literature are reviewed in a recent Scottish Government publication^[19].

3.24. Overall, there is great potential to raise productivity and earnings. In the digital technologies industry, productivity is three times the Scottish average^[20], but digitalisation has the potential to raise productivity across many other sectors. However, it can be hard to sustain this argument given the poor productivity performance of most of the major economies over the last decade.

3.25. Projections around the impacts of digitalisation, and the implications for skills are fraught with difficulty, however. Leading academics in this field estimated in a 2013 book^[21] that nearly 50% of US jobs were at risk from digital technologies within a 10-20 year time span. The OECD have argued that more weight needs to be given to the job creation potential of digitalisation, but nonetheless conclude the 9% of UK jobs are at risk by 2030^[22]. A study by McKinsey^[23] of a small number of leading economies, excluding the UK but involving the US and Germany, comes out with a projection roughly mid-way between the two quoted above.

3.26. The key drivers of digitalisation are the falling real cost of computing and the increased availability of 'big data'. However, there remain 'engineering bottlenecks' which protect some tasks from computerisation. These relate to:

• Perception and manipulation tasks.
• Creative intelligence tasks.
• Social intelligence tasks.

3.27. Building on these concepts, Frey and Osborne applied their model^[24] to 702 occupations which they ranked from low to high risk of 'computerisation'. Just as an illustration, the 10 occupations most and least at risk from digitalisation are listed in the table below.

10 Occupations Least at Risk	10 Occupations Most at Risk
Recreational therapists	Telemarketers
First line supervisors of mechanics, etc.	Title examiners + searchers
Emergency managing directors	Hand sewers
Mental health social workers	Mathematical technicians
Audiologists	Insurance underwriters
Occupational therapists	Watch repairers
Orthotists + prosthetists	Cargo + freight agents
Healthcare social workers	Tax preparers
Oral surgeons	Photographic process workers
First line supervisors of firefighters.	New accounts clerks

3.28. The National Endowment for Science, Technology and Arts (NESTA) using different methods (based on a mix of expert consultations and machine learning analysis) also explored the future of specific occupations.^[25] They classify occupations in terms of those most likely to experience declines and increases in employment. Their findings are summarised below.

10 Occupations Projected to Expand	10 Occupations Projected to Decline
Food prep + hospitality trades	Mobile machine drivers + operatives
Teaching + education professionals	Elementary admin occupations
Sports + fitness occupations	Elementary sales occupations
Natural + social science professionals	Elementary storage occupations
Managers in hospitality + leisure	Customer service occupations
Health + social service managers	Customer service managers
Artistic, literary + media occupations	Assemblers + routine operatives
Public service + related professionals	Elementary agricultural organisations
Other elementary service occupations	Other admin occupations
Therapy professionals.	Printing trades

3.29. Similarities are clear between the occupations most and least at risk as digitalisation beds down – but there also differences with NESTA drawing a stronger association between the skill levels required and occupational redundancy compared to the work of Frey and Osborne.

3.30. More generally, there are some consistent themes emerging from the wider literature:

• Digital technologies will influence most forms of work and most workplaces, and more jobs, or tasks within jobs, will be done by machines.
• Digital technologies will increasingly find new ways of connecting and collaborating on the global business stage, opening up many new market opportunities.
• The information landscape will become increasingly complex over time, putting a premium on skills and systems that are able quickly to interpret and exploit what is out there.

3.31. As the role of machines grows, workers will become more focused on tasks such as working with and supporting others, and using creativity and drive to deal with complex issues.

3.32. More generally, there are two big issues for Scotland and other economies:

• Will digitalisation will decrease or increase the aggregate demand for labour? Potentially, Scotland's flat demographic profile could prove advantageous should the pessimistic scenario prevail. Historically, however, major technological changes have generally been associated with increased numbers of jobs and a rising demand for labour, but within this specific occupational groups and communities have often suffered great and long-lasting distress.
• What are the likely impacts on the mix of 'good' and 'bad' jobs, and the distribution of earnings between high and low in the labour market? The more empirically based analysis to date suggests that digitalisation will impact across the occupational and earnings spectrum, but there is no certainty about this.

3.33. The challenges in the modern era may be the pace of change of associated with digitalisation and the speed of transfer as a result of economic globalisation, making it more difficult for our economy and society to respond positively and effectively to the new digital technology.