Why Scotland’s recruitment market is defying the economic data

The strength of the recruitment market has historically followed the wider economy. When businesses are growing, firms hire to fulfil new work; when conditions weaken, hiring usually slows.

But in recent months that relationship has begun to look much less aligned - and there is evidence to suggest it may, in fact, be fundamentally changing.

Scotland's economic outlook has provided few reasons to be overly positive: inflation has been sticky, consumer confidence remains fragile, and activity in the private sector has waned. Further still, Scotland has lagged behind other parts of the UK in many of these tried-and-tested indicators.

Some businesses are likely to be recruiting to prepare for future demand.

At the very same time, though, employment across the private sector increased at its fastest rate in nearly two years, according to Royal Bank of Scotland’s Growth Tracker. Businesses were also at their most confident for four months, recovering steadily from April’s lows, even though many of the same issues remain relevant today - from international geopolitical instability to elevated borrowing costs at home.

The latest KPMG/REC Report on Jobs only adds to the seemingly counterintuitive picture. Traditionally, when permanent placements are on the rise, interim positions fall: firms hire temporary workers when confidence is low and feel more willing to commit to long-term appointments when the outlook is strong.

Yet, the research showed that permanent placements stabilised in July after 45 consecutive months of decline. On the contract side, billings growth is close to its strongest level in three years, while demand for short-term workers rose for the first time in two years. It is rare for both to be positive simultaneously.

Several explanations have been put forward for these mismatches. One is labour hoarding, where firms keep workers on their payroll during a downturn to hold on to talent. Many firms still remember having to let people go during the Covid-19 pandemic and being caught out by the subsequent upturn in activity, leading to a very competitive market for talent.

Mark Lewis is chief executive officer of Livingston James.

Another is that some businesses are recruiting to prepare for future demand. In recent months we have seen indications of that playing out in the corporate finance market, with many dealmakers moving into deal origination roles, suggesting there could be more transactional activity on the horizon.

Others believe the current slowdown is temporary, with a recovery just around the corner. That is certainly borne out in Royal Bank of Scotland’s Growth Tracker, which said confidence was rising supported by hopes of stronger future sales, new projects, and greater efforts from businesses to diversify their offerings.

All of these are plausible explanations - and the likelihood is that they are all contributing in some way. But another factor that has emerged through the experience of recent years is more businesses realising that, whatever the prevailing data shows, they need to have the very best people in their teams – particularly in the key decision-making seats.

Moreover, those individuals, supported by rapidly improving technology and stronger long-term insights, are able to make the right calls for their organisations based on genuine foresight rather than knee-jerk reactions to short-term market volatility.

With that, the way many firms think about recruitment is changing. The traditional cycle of businesses growing and subsequently needing more people is giving way to a more strategic approach, which places an emphasis on having people capable of helping organisations perform to their best, regardless of what is happening in the wider world.

In other words, it is not a question of “how many people do we need right now”, but “which people can materially improve our ability to navigate uncertainty at all times”. And thinking about recruitment in that way provides a level of resilience that can be a huge competitive advantage.

That is one of the principal reasons why, despite the economic backdrop, we are seeing more organisations invest in finding the right people and equipping them with the best available technology. That has picked up pace as AI has become more ubiquitous, with leadership teams moving towards scenario-based management - preparing themselves for multiple potential outcomes - and utilising better tools and insights to steer their organisations forward, whichever way the future unfolds.

As more firms harness that combination of people and technology to look five, ten, or even 15 years ahead with greater certainty than ever before, we have seen record demand for professionals with expertise in forward-looking disciplines, such as data, analytics and, increasingly, AI. These skills are helping organisations shape long-term plans and stay committed to them, while still responding appropriately to immediate shocks.

There are a multitude of reasons why the rules have changed and the traditional markers of a positive labour market no longer seem to apply. While some of those may, in turn, see businesses take on fewer people on a cyclical basis than might have been the case a decade ago, they are more motivated than ever to invest in finding the right people on an ongoing basis.

And, in a world where access to increasingly powerful technology is levelling out, more leadership teams are realising the differentiator will be the quality of the people deciding how to wield it. With that, they also know that hiring the best talent today will undoubtedly put them in the strongest position possible to face whatever tomorrow holds.

Mark Lewis, chief executive, Livingston James