Skill Mismatches in Transition Economies – Quantitative indicators should be treated with caution

In transition economies, the proportion of the adult population educated to the secondary level or higher (the stock of human capital) is on par with that in mature market economies. Policymakers often use educational attainment data as one of their country’s key competitive advantages for attracting foreign investment and innovation. However, these quantitative indicators should be treated with caution in transition economies, where they can be a poor proxy for the true stock of human capital. High levels of formal education do not necessarily translate into high levels of up-to-date productive skills. Rapidly expanding higher education systems often fail to equip young people with adequate skills because of the low quality and relevance of education programs. Lifelong learning opportunities that could counteract the obsolescence of diplomas obtained under central planning and develop skill proficiency among adult workers are scarce. As a result, substantial skill shortages coexist with overeducation and structural unemployment, which affect both young and old workers. This paper summarizes the evidence of skill mismatches in transition economies, drawing on recent studies based on surveys of firms and households.

Large imbalances between the supply and demand for skills in transition economies are driven by rapid economic restructuring, misalignment of the education system with labor market needs, and underdeveloped adult education and training systems. The costs of mismatches can be large and long-lasting for workers, firms, and economies, with long periods of overeducation implying a loss of human capital for individuals and ineffective use of resources for the economy. To make informed decisions, policymakers need to understand how different types of workers and firms are affected by overeducation and skill shortages.

Key findings

Pros

• High educational attainment of the population is an attractive feature for foreign investment and innovation.
• Some degree of skill mismatch is inevitable in an era of rapid technological change and globalization.
• Overeducated workers may represent an opportunity for productivity gains for firms and regions.
• Overeducation is not a concern if it is a short-term mismatch that affects mainly young people.
• Successful skill development calls for cooperation of education systems, labor market institutions, employers, and individuals.

Cons

• High levels of formal education do not necessarily translate into high levels of up-to-date productive skills.
• The inadequacy of workers’ skills affects firm performance, technological investments, and competitiveness.
• Long periods of overeducation imply a loss of human capital for individuals and ineffective use of resources for the economy.
• Older workers risk being trapped in jobs with low educational requirements because of skill obsolescence.
• Improving career guidance and the quality and relevance of formal education is necessary but not sufficient for reducing skill mismatches.

Conclusion

Policymakers should be concerned not only with increasing the stock of human capital, but also with enhancing its quality and allocating it efficiently. Innovative firms need assistance in matching job-seekers with employment opportunities, while other firms need help in adopting new technologies, creating skilled jobs, and investing in worker training. Improving overall workforce quality could attract advanced technologies and stimulate local labor markets. It is also crucial to equip older displaced workers with up-do-date skills through adult training so that they are able to stay in productive employment longer.

Chosen excerpts by Job Market Monitor. Read the whole story at  IZA World of Labor – Skill mismatch and overeducation in transition economies