Unemployment in Scotland has fallen to 4.3%, below the UK average, but official figures published on Tuesday also show job vacancies across the UK dropping to their lowest level in more than five years as smaller businesses cut back on hiring.

Data from the Office for National Statistics (ONS) showed that 119,000 people aged 16 and over were out of work in Scotland between June and August. The unemployment rate was 0.4 percentage points lower than in the previous quarter and below the UK-wide rate of 4.7%.

The picture was not entirely positive. Scotland’s employment rate for people aged 16 to 64 fell by 0.4 points to 74%, suggesting that part of the drop in unemployment reflects people leaving the labour market rather than moving into work. In total, 2.631 million people aged 16 and over were employed in Scotland during the quarter.

UK unemployment edges down

Across the UK, unemployment fell to 4.7% in the three months to August, from 4.9% in the previous figures. The employment rate edged up, and the ONS said that while the number of employees on payrolls remained slightly lower over the period, the latest monthly data suggested that decline might be starting to level off.

But vacancies fell by 21,000 to 691,000 in the three months to September, the largest drop since the start of the year. Construction saw the biggest decrease. The ONS said the fall was concentrated in smaller businesses, which cited higher labour costs as a key reason for scaling back recruitment.

David Freeman, the ONS deputy director of labour market statistics, said the labour market had remained “broadly flat” in 2026. “Data from the latest quarter shows the employment rate edging up and a small drop in unemployment,” he said. “The number of vacancies has seen its largest fall since the start of the year, concentrated mainly within smaller businesses, which cite increased labour costs as a key factor.”

Costs squeeze small employers

Businesses have faced rising energy costs since the start of the Iran war, and many employers say increases in National Insurance contributions and the minimum wage have made it more expensive to take on staff. Small firms, which typically have less room to absorb higher costs, appear to be responding by holding back on new hires.

Pay growth has slowed but remains ahead of prices. Average earnings excluding bonuses rose by 3.7% in the three months to August. After taking inflation into account, regular wages grew by 0.8% in real terms, a modest gain for households still facing high food and energy bills.

Young people still locked out

Work and Pensions Secretary Pat McFadden said the figures showed “the resilience of our labour market”, noting that the UK’s employment rate was now the third highest in the G7 despite global uncertainty. But he acknowledged that “too many young people still find themselves locked out of employment”, and said the government was working with industry to bring them into work and prevent them from drifting into the welfare system.

The unemployment rate among 16 to 24-year-olds was 15.6% in the June to August quarter. That was lower than the 16.4% recorded between March and May but higher than the 14.6% seen a year earlier. Prime Minister Andy Burnham has described rising youth unemployment as an economic catastrophe and has pledged significant changes to the welfare system to tackle the number of young people not in education, employment or training.

What it means for Scotland

Scotland’s lower jobless rate will be welcomed by ministers in Edinburgh, who are seeking to attract investment in energy, manufacturing and exports. But the fall in Scotland’s employment rate, together with the UK-wide slowdown in vacancies, points to a jobs market that is cooling rather than strengthening.

For workers, fewer advertised vacancies can mean more competition for each job and less bargaining power over pay. For employers, especially smaller firms in hospitality, retail and construction, the combination of higher labour and energy costs is likely to continue to weigh on hiring decisions.

Economists will be watching closely to see whether the stabilisation in payroll numbers holds in the coming months, and whether falling vacancies are an early sign of rising unemployment later in the year.