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Home Opinion The skills mismatch
Employment • Skills • Mismatch

The skills mismatch

Geraint Johnes - 17 June 2014

For the market to maintain the flexibility that is needed, the matching of workers to jobs should be as efficient as possible. Government, business and the education sector need to do more to make this happen

The ride that the economy has been on over the last few years has certainly been unusually turbulent, and, as we recover from the Great Recession, it is becoming increasingly clear that the recovery does not take us back to where we were before. While the overall rate of growth of output now looks quite healthy, and while the rate of unemployment is falling, lurking behind these macroeconomic indicators are some less comfortable trends.

The reports data (p.29) that show a huge increase the proportion of workers who are working part-time because they are unable to find full-time work. This proportion has more than doubled since 2008. These data are reinforced by work by David Bell and David Blanchflower, published as a quarterly series by the Work Foundation. The Bell-Blanchflower index shows us what the unemployment rate would be if allowance is made for the fact that some people do not work as many hours as they would like (while others – a smaller number – have to work more). Until the recession, the Bell-Blanchflower index tracked the unemployment rate quite closely. Since, it has stubbornly stuck at around two percentage points above the unemployment rate. Quite clearly, the labour market has not yet recovered its ability to function well enough to ensure that the right people are being matched with the right jobs.

More weight is added to this argument by the fact that many employers are already reporting skills shortages, with as many as three in ten vacancies being reported as being hard to fill. The Bank of England (p.28) shows that agents’ reports (informed by business intelligence) likewise suggest that firms are already approaching capacity.

Hence, the Bank’s estimate of the size of the output gap (the gap between current and potential GDP) is much smaller than might be expected given that GDP remains way below its trend value. Yet, if the labour market could allocate workers to jobs in a more efficient manner, many of these issues could be resolved and prospects for further sustained growth would be improved.

A generation ago, many economists spoke of 'hysteresis' - the tendency for blips in unemployment during recessions to become long-lasting. This is usually attributed to the depreciation of skills and the increased potential therefore for unemployed workers' attributes not to match well with those required by firms. Are we experiencing something like this now?

There is some evidence to suggest that we might. Alfonso Arpaia and Alessandro Turrini have evaluated a measure of such mismatch for some 22 European countries. These results show that the efficiency with which unemployed workers are matched with jobs fell in most of these countries quite soon after the economic crisis hit.

There are some interesting exceptions - efficiency has risen in Denmark. This may be the result of the 'flexicurity' of the labour market in that country - a system where extremely high degrees of job mobility are accompanied by a robust system of social security and active labour market policies. In Romania, too, matching efficiency has risen with just a bit of a flattening out in recent years. In many countries - especially those in Eastern Europe - the fall in matching efficiency followed a sharp peak, itself probably the result of introducing more liberal labour market policies following transition.

In the UK, the efficiency of matching fell sharply with the recession, and has not recovered since. Arpaia and Turrini's findings suggest that a high incidence of long term unemployment is one of the major factors underpinning this fall in efficiency. And in the UK, long term unemployment has risen markedly since the recession. At the end of 2007, there were workers who had been unemployed for over a year; although the number fell markedly in the last quarter of last year, there are now some.

So, both in terms of the types of jobs that people are doing and the hours that they are working, some inefficiency has crept into the matching process between workers and firms – and the damaging impact that long term unemployment has on workers’ skills seems to be an important part of the explanation for this. Looking at the international evidence, recession has had a similar effect in many countries. But the international evidence also offers a few pointers about how efficiency in matching can be improved. The Danish example, in particular, where active labour market policies support the functioning of the labour market, reducing the incidence and impact of long term unemployment, is worthy of greater investigation. The mandatory upskilling of unemployed workers, combined with support for their job search activity, is a key feature of these policies. The government plays a clear role in setting the policy framework and in incentivising educational providers and employers to supply training opportunities aimed at genuine skills enhancement – for young people, and also for workers with several years of experience. Once the incentives are in place, the responsibilities of the business and education sectors become clear.

The interaction of these two sectors will indeed be key to the sustainability of the recovery in other countries, including the UK. Ensuring that this interaction has a high rate of return will involve the education sector not only in providing  training, but also in following this training up to ensure that what is learned is retained, put into practice in the workplace, evaluated, and enhanced. Educational institutions need to support their stakeholders – which include the broad business communities within which their alumni work (or seek to work) – on an ongoing basis, engaging with them long after they have completed their full-time education, and ensuring that learning secures the maximum possible economic and societal impact. This requires a substantive integration of the education and business sectors, with learning and research passing between the two in a much more seamless fashion than we have generally managed before. It requires training to be led by the needs of business stakeholders.

The reach of this activity should go beyond current employees, with firms and educational institutions given the incentive and responsibility to raise and update the skills of unemployed workers, thereby directly addressing issues of mismatch. Putting what we already know into practice, if it can be done effectively, can result in very substantial one-shot gains; ensuring that our education and business sectors are properly integrated, feeding learning back into one another on an ongoing basis, offers the greater promise of continuing benefits - raising not only the level but also the rate of growth of productivity, and increasing the efficiency with which the labour market operates.

It is facile to contend that, with the unemployment rate falling rapidly, the labour market is functioning well – in some respects it is, but in others it is not. For the market to maintain the flexibility that is needed, the matching of workers to jobs should be as efficient as possible. While long term unemployment rates remain high, this will not happen. There is work for government, business and the education sector to do to bring these rates down. Just as in the 1980s - when Richard Layard and others argued in favour of helping the long term unemployed back to work because doing so would not add to inflationary pressure - helping these workers now is an imperative.

Geraint Johnes is director of the Work Foundation and professor of economics at Lancaster University Management School

This is a contribution to Policy Network's work on Progressive Capitalism.

Tags: Geraint Johnes , Opinion , Inequality , economy , society , Jobs , Welfare , Work , Minimum Wage , Living Wage , Wages , Pensions , Childcare , Contributory Benefits , Flexicurity , Jobs , Contracts , 0-hour Contracts , Zero Hour Contracts , Labour Market , Skills , Training , Education , Technology , Innovation , Automation , Growth , Employers , Education & Training System , Business , Collaboration ,

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The Policy Network Observatory promotes critical debate and reflection on progressive politics. It is centre-left orientated but determinedly challenges social democracy. It is pro-European but restlessly questions EU institutions and practices.

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