We can all agree that 2022 was a challenging year for Scottish businesses. The excessive cost of doing business and impacts of high inflation are set to persist. Despite government support, energy costs will also continue to trouble businesses and households, particularly when that support is rolled back from March.

But another pressing issue for the year ahead is labour market supply and skills shortages. Firms will be expecting both governments at Holyrood and Westminster to step up their focus to help address this.

As the latest Scottish Chambers of Commerce quarterly business survey showed, recruitment difficulties and labour market shortages continue to feature as a top concern for businesses, affecting their confidence and reducing investment appetite. These concerns were on an upwards trajectory throughout 2022 and are set to persist this year, with particular challenges for construction, manufacturing, hospitality, and tourism.

The COVID-19 pandemic put a microscope under the existing challenges that we face around education, skills, training, and migration. It has also instigated new challenges that we must work together to tackle such as: new models of working; tightening labour markets; industry & skills transitions; and the urgent need for tailored reskilling and upskilling interventions.

A key reason why the labour market has tightened is because of a marked increase in the number of inactive people – those without a job and not actively seeking one.

Increases in inactivity levels seen towards the start of the coronavirus pandemic have largely been reversed in most major economies, except in the UK, where the increases in inactivity have been more persistent. Analysis by the Office for National Statistics finds that this is partly a reflection of older workers leaving the labour market since the start of the coronavirus pandemic.

Interest in working is also at the lowest amongst the inactive population. Fewer than one in five (17.6%) of those inactive indicated they would like a job despite not currently looking.

Additionally, Scotland’s ageing population, coupled with the prospect of reduced net migration to Scotland, poses a substantial challenge to the economy and the ability of businesses to access the skills and talent that they need.

The Fraser of Allander Institute’s Scottish Business Monitor recently found that nine in 10 businesses were struggling to hire the staff they need. More than 75 per cent found a lack of required skills or experience continued to be the greatest challenge in filling their roles, with a lack of applications identified as an additional barrier.

As the frontline business support network, we understand the needs of Scotland’s businesses and the policy levers required to ensure growth in the economy.

Our recommendation, as cited in our 2021 publication Rally for Growth, is for a training revolution in Scotland which prioritises support for retraining and reskilling workers at every stage of their careers. We believe delivering this priority should be the focus of the Scottish Government’s independent skills review’s recommendations including a clear focus on workforce development and critical skills development. This should also include expanding the scope of education beyond our youngest to help navigate business recovery and growth, which will necessitate the reskilling of huge sectors of our workforce.

Given the scale and nature of challenges facing the economy, our view is an ambitious training revolution needs to be rolled out with a ‘coalition’ approach which brings together employers and the education system, with Skills Development Scotland acting as the agency body to coordinate and lead delivery.

This will also require action from government both north and south of the border.

The Scottish Government must continue to work with industry to support Scotland’s workforce to upskill and reskill to match the needs of business. Re-training opportunities should be expanded to help people back into work and expand upskilling opportunities to help those out of work secure jobs in emerging and growing sectors now and in the future.

The UK Government must be pragmatic and listen to business calls for a flexible migration system which aligns with economic need. With more vacancies in the UK than people available to fill them, this route cannot be avoided if we are serious about plugging gaps in the labour market.

Partnership between government, the private and public sector will be essential to deliver the bold steps needed to enable a more agile and responsive system, that adapts to changing demands and delivers for our businesses and communities.