Inevitably the future size of the Scottish labour force will be determined by two factors: the population of working age; and the participation rate.

In the medium/long term, the demographic structure of Scotland can be projected on the basis of the underlying trends in fertility and mortality rates and the net migration flows. The latest projection from the General Register Office (GRO) for Scotland is that the total population of Scotland will fall from 5.13 million in 1996 to 5.06 million in 2011. This projection represents a continuation of the post war trend of an average annual population growth close to zero - the population of Scotland in 1951 was 5.10 million - and confirms the vulnerability of Scotland to continual centripetal pressures within the context of UK and international economic development.¹⁵ (Between 1951-96, the population of England rose by 20 per cent). Usually, in developed economies, a lack of population growth is not a healthy sign, as population increases are positively associated - as both causes and effects - with economic dynamism. However, there are factors which may mitigate against the base projections for Scotland. First, it is to be expected that the impact of IT will continue to reduce the importance of physical location in some sectors and thereby partly offset the adverse impact of geographic peripherality. In addition, it is the case with population projections that they may not be able to take full account of a major shift in the determinants of migration flows. It is feasible, for example, that one effect of devolution might be to stimulate a net inward migration of professional/managerial/ entrepreneurial talent.

Within the overall demographic profile for Scotland, it is expected that there will be a marked shift in the distribution by age. In particular, while the total cohort aged 20-59/64 is expected to remain broadly unchanged, within this group, the numbers aged 20-39 will fall by 295,000 (or 19 per cent) and those aged 40-59/64 will increase by 266,000 (also 19 per cent).¹⁶ This will affect the supply of labour by age-group and may have an impact on relative wage levels, depending on the adjustments made to labour demand.

Labour market participation covers those in employment, self-employment, government employment and training programmes and the unemployed who are actively seeking work. The overall participation rate of those of working age in Scotland has been stable in recent years. As shown in Chart 4, data from the Labour Force Survey (LFS) for Spring (March to May) each year show the rate to have been between 77-78 per cent of those aged 16-59/64 since 1992. It is also important to note that the "all persons" rate for Scotland masks the different trends for males and females, in which the long term decline in male participation has been offset by the steady rise in the participation of females of working age. According to the LFS, the participation rates of males aged 16-64 fell from 88.0 per cent in 1984 to 82.4 per cent in 1997; for females aged 16-59, the corresponding rates were 62.9 per cent and 71.2 per cent.

CHART 4 HERE [to be supplied]

The latest (Autumn 1997) rate of just over 77 per cent in Scotland is 1½ percentage points below the UK average and some 5 percentage points below the rates in the South East and Eastern Regions. This suggests that there is scope for the participation rate in Scotland to increase. One would normally expect the participation rate to increase in an economic upswing, as people are encouraged into the labour market when unemployment falls, and vice versa. However, the Chart shows that, while an inverse relationship between the participation rate and the rate of unemployment (under the ILO measure) held in the 1980s, this has not been the case in recent years. This may be attributable to a number of factors, including increased student numbers, rising Incapacity Benefit claims and a higher incidence of early retirement, as well as more recent changes to the administration of unemployment related benefits.

In Scotland, the employment rate (the percentage of the working population in employment) is currently 70 per cent, slightly below the UK rate of 72.5 per cent. The objective of raising the employment rate is central to the Government's strategy of reducing welfare dependency, extending opportunities and improving economic performance. As described, this can be done by increasing the effective labour supply and/or reducing the underlying rate of unemployment, and a number of policy measures are being put in place to promote employability and work incentives through tax and benefit reform.

The most recent official projections of the labour force in Scotland were published in 1995 and give the estimated change from 1995 to 2006¹⁷. Although there would now be minor amendments to the underlying assumptions on population size and labour market participation, the basic features of the projections would be broadly unchanged. Scotland stands out in the projections as being the only one of the former standard planning regions/countries of the UK expected to have a reduction (albeit marginal) in the size of its labour force over this period. The decline - of 0.2 per cent - is brought about by the fall in the population of working age not being offset by a small increase in the participation rate. Across the UK as a whole, the growth in the labour force was projected to be 6 per cent; in East Anglia and the South West, the respective projections were 13 per cent and 10 per cent.

Business surveys

Otherwise positive results from the business surveys across most sectors have been somewhat overshadowed by the effect of the strong pound on the manufacturing sector (discussed above). The CBI Industrial Trends Survey of Scottish manufacturers showed a further rise in optimism in January, with a return to growth in orders and output. Growth in orders and output is expected to continue at a similar rate over the next 4 months. Capacity utilisation also improved significantly although investment intentions in plant and machinery became negative for the first time since April 1993 and investment intentions in buildings decreased further. Average unit costs fell markedly in the 4 months to January and were expected to fall further. A further downturn in domestic prices was evident in January, although at a slower rate than in October but this is expected to be temporary. Meanwhile, export prices fell and further declines were anticipated.

The Scottish Chambers' Business Survey covers a number of other sectors in addition to manufacturing. Manufacturing business confidence rose again in 1997 Q4 after falling in the third quarter and in construction optimism rose for the fifth successive quarter. Within the distribution sector, confidence fell in both wholesaling and retailing and a decrease in business optimism in the tourism and leisure sector was also reported in the final quarter. Manufacturing orders and sales rose at a slightly faster rate than in the third quarter. However, there were major differences in performance in key markets with the domestic market holding up but orders and output falling appreciably in export markets. In construction, new orders showed a further small increase, buoyed by strong growth from the private sector. Despite the fall in optimism, retail sales remained positive and in wholesaling, sales rose at a faster rate. Likewise, tourism demand continued to increase but only from domestic markets.

Employment rose for a net balance of firms across all sectors except in finance in the fourth quarter. Some easing in employment levels in the service sector is forecast for the first quarter of the year. Recruitment activity remained strong across most sectors with recruitment difficulties evident in recruiting suitably skilled labour. In contrast to the CBI, manufacturing investment intentions in plant and machinery showed a further strong increase in 1997 Q4 and respondents expect to revise these intentions up again in the first quarter. However, investment intentions in land and buildings became negative.

The December 1997 survey by Scottish Engineering reported another increase in business optimism which was evident across most sectors. Similarly, there was an overall increase in order intake. The UK market was reported to be strongly positive with total domestic orders strengthening for the fifth successive quarter and increasing in almost all sectors. However, export orders declined for the third successive quarter, falling in all sectors. Meanwhile, output rose in all sectors and sizes of company. Capital investment and training plans continued to increase across all sectors and sizes of company and staffing levels also increased. Prices continued to fall in almost all sectors of the industry.

Independent Forecasts of the Scottish Economy

GDP Growth

The latest short term projections for the UK and Scotland monitored by the Scottish Office Education and Industry Department are summarised in Table 7, which gives the forecasts for 1998 and 1999. All forecasters expect a deceleration in growth in Scotland this year, in common with the UK as a whole. Business Strategies Limited (BSL) anticipate that growth will exceed that of the UK in both years, while Cambridge Econometrics (CE) forecast slightly slower growth in Scotland. However, all forecasters agree that growth will slightly exceed 2 per cent. There is less consensus in 1999 with forecasts ranging from 1.6 to 2.5 per cent. However, with the exception of forecasts from the Fraser of Allander Institute (FAI), a slowdown in growth is anticipated.

Table 7: Independent Forecasts of GDP Growth in Scotland and the UK, 1998 and 1999

Employment

Table 8 summarises the most recent forecasts for the growth in employment in Scotland and the UK in 1998 and 1999. Both BSL and CE expect employment growth to continue in 1998 and lie within a narrow range, equating to growth of around 15,000 jobs. FAI expect a fall in employment but this is expected to be regained in 1999. BSL anticipate a fall in employment in 1999 (in common with the UK), while CE predict that growth in employment will slow in 1999.

Table 8: Independent Forecasts of Employment Growth in Scotland and the UK, 1998 and 1999

Unemployment

Table 9 summarises the most recent projections of the average claimant count unemployment rates in Scotland and the UK in 1998 and 1999. CE and BSL expect a fall in the average unemployment rate this year, while FAI expect the 1997 rate to be maintained. However, given current unemployment rates in January (5.8 per cent in Scotland and 5.0 per cent in the UK), some increase in unemployment is implied by all forecasters. Only FAI expect a fall in the Scottish unemployment rate next year.

Table 9: Independent Forecasts of Claimant Unemployment Rates in Scotland and the UK, 1998 and 1999

Notes:
1. The rank is of the 11 UK standard statistical regions; lowest =1st.
2. The average claimant unemployment rates in Scotland and the UK in 1997 were 6.4 per cent and 5.6 per cent respectively.