How Scottish businesses can respond to a more expensive labour market
Duncan MacCaig, Business Services Partner, Armstrong Watson, looks at the rising cost of the labour market in Scotland, and how employers can strategically plan for the future.
For many Scottish businesses, the labour market is no longer just a people issue. It is now a cost issue, a productivity issue and, increasingly, a strategic one.
Rising wage bills, higher employer National Insurance costs and pressure to improve pay, are forcing employers to think more carefully about how they hire, retain and develop talent.
Research from The Scottish Chambers of Commerce suggests recruitment remains a major challenge for Scottish businesses, with 47% reporting recruitment difficulties in Q1 2026, up from 37% the previous quarter, suggesting many employers are becoming more cautious about hiring as labour costs rise.
In a tighter cost environment, businesses need to be clearer about where recruitment genuinely adds value, where technology can remove manual pressure, and where better workforce planning can reduce churn.
Employers who look at role design, training needs and productivity alongside pay are likely to be in a stronger position than those reacting vacancy by vacancy.
Practical and long-term thinking is especially important to ensure your business is more profitable and sustainable in the future.
Broadening talent pipeline
The pipeline for future talent is widening, extending beyond universities to include colleges, apprenticeships, school pathways and adult learners building new skills later in their careers, and employers who widen their lens on experience, qualifications and progression are more likely to find capability in a competitive market.
Changes to employment law
At the same time, the rules around employment are changing. The Employment Rights Act 2025 transforms workplace rights and is being introduced in phases across 2026 and 2027. Some changes are already in force, including day-one family leave and unpaid parental leave, stronger statutory sick pay rights and tougher collective redundancy protections, while wider reforms, including guaranteed hours measures and changes to unfair dismissal, are still being phased in.
For employers, particularly small and medium-sized businesses that must adapt systems, policies and budgets, the costs will be felt before any longer-term benefit.
Increasing use of AI
AI is becoming part of the picture too, and the latest Business Insights and Conditions Survey (BICS), from September 2025, shows an increasing share of businesses are adopting the technology (26.7% up from 14% in 2023). For many businesses, the immediate opportunity is less about replacing people – only 15% expect their headcount to decrease – and more about improving how work gets done. The data shows that the main reason businesses are adopting AI is to improve operations (54%).
Understandably, many firms remain cautious about cost, skills and where the technology can be used effectively. In practice, that points to a gradual shift: using AI to reduce repetitive admin, improve access to information and free up people for higher-value work. In a higher-cost labour market, that kind of efficiency may matter just as much as recruitment itself.
With this backdrop, the strongest businesses are unlikely to be those chasing the cheapest labour or the newest technology in isolation. Business owners will need to take a balanced view: controlling cost, widening access to talent, complying with changes to employment law and using AI effectively. Having a full grip on the current financial standing of your business will provide you with a clearer picture, allowing you to make informed decisions to build a more resilient and cost-effective workforce for the long-term.
For future-proof business planning advice and support, please get in touch. Call 0808 144 5575 or email [email protected].