Report

Skills Mismatches in Europe – Addressing them can increase competitiveness

Skills mismatches are widely accepted as a factor that drags down on potential economic growth and as such require concrete policy measures both at the EU and national level. Current and long-term demographic trends make this an issue of particular acuteness – against a projected decline in the labour force and an increase in the average age, European economies cannot afford to waste human capital.

Previous studies on the causes and effects of skills mismatches have shown that:

o Skills mismatches can adversely affect labour productivity and can explain some of the existing cross-country productivity gaps, while also being reflective of differences in the policy environment, including education and labour market related regulations and programs;
o Economies which include larger shares of adults with irrelevant skills find it difficult to introduce productivity-enhancing technologies and new ways of working;
o Skill requirements have and will continue to change rapidly in the presence of technological advancements and increasing international competition. For instance, basic information and communications technology (ICT) skills are no longer perceived as sufficient by most EU workers – the overwhelming majority of them believe that they need moderate ICT skills in order to do their job;
o The results from both the Program for the International Assessment of Adult Competencies (PIAAC) and the European Skills and Jobs Survey (ESJS) show that a larger part of the mismatch is due to over-skilling/education;
o This is a consequence of both ineffective resource allocation (leading to underutilization of the existing stock of skills) and general imbalances between the skills of the workforce and labour market demand;
o Efficient education, vocational education and training (VET) and lifelong learning policies are key to addressing the skills mismatches problem and should be supported by adequate active labour market policies and intermediation services on behalf of employment agencies;
o Vocational education provides participants with some of the tools necessary to minimize the risk of prolonged labour market inactivity that can have lasting scarring effect on a person’s long-term career prospects. The latter is of particular importance, as inactivity itself can be a potential source of skills mismatches because of the inability of the long-term unemployed to “keep up” with changing skill requirements.

This report is dedicated to the study of skills mismatches in the EU, while also providing insight on five pre-selected EU reference countries (Austria, Bulgaria, Finland, Germany and Spain). This selection ensures that both “newer” and “older”, core and peripheral EU Member States are taken into account, while also controlling for variations in economic and labour market cycles.

Our findings are supported by macroeconomic, microeconomic and survey-based data, as well as an extensive review of available research related to ongoing labour market developments at the EU, national and sectoral levels.

We conclude that:

Addressing skills mismatches can increase the competitiveness of EU businesses

o Businesses across economic activities in the majority of EU Member States have experienced a gradual increase of both qualitative and quantitative labour shortages, which is one of the main macroeconomic manifestations of skills mismatches;
o Effective labour allocation and skill-pool utilization is a vital prerequisite for ensuring the ability of EU enterprises to continue to develop their innovation capacity and to withstand increasing competitive pressures;
o Our quantitative assessment of the effect of skills mismatches on the EU economy (based on ESJS data) indicates an estimated annual productivity loss of 2.14% due to existing mismatches, which equates to EUR 0.80 per hour worked in 2014 in nominal terms (ESJS’s reference year);
o Our research provides additional evidence in support of the Mismatch Priority Occupations (MPOs), established by Cedefop. These are occupations with critical shortage that have important economic implications. MPOs include both high skilled (ICT professionals, medical doctors; science, technology, engineering, and mathematics (STEM) professionals; nurses and midwives; teachers) and intermediate level skilled occupations (such as welders, cooks and truck drivers).
Businesses are affected negatively by the skills mismatches issue in a variety of ways
In order to gain additional perspective on the causes and effects of skills mismatches, the Institute for Market Economics (IME) prepared an online survey2 that was carried out in Q4 2017 among Austrian and Bulgarian companies. The survey was designed with the aim to provide further information on different aspects of skills mismatches from the point of view of companies. Our results indicate that:
o Skills mismatches affect companies in a variety of ways, among which the need for additional expenditures on employee training, loss of competitiveness and slower hiring of additional workers;
o The companies that took part in our survey point to “insufficient traditions in lifelong learning and (re)qualification” as the most significant factor for skills mismatches;
o While skill mismatches have moderate effect on the expansion plans of companies, firms in economic activities such as professional, scientific and technical activities, ICT, transportation and manufacturing are among the most affected in this regard;
o People aged less than 24 years and over 65 years are deemed most susceptible to skills mismatches, while those aged 40-54 years are perceived as the least likely to be affected by skills mismatches;
o 71% of companies engaged in professional, scientific or technical services and 67% of ICT companies assign high significance to the effect that skill mismatches have on the hiring of additional workers;
o The general consensus among companies is that “finding suitable employees used to be easier, is currently hard and will become increasingly difficult in the future”;
o Companies face difficulties when trying to find highly qualified workers. They usually need more than 90 days to fill in positions for professionals and managers, technicians or associate professionals. On the other hand, finding suitable clerical support or employees in elementary occupations usually takes less than 30 days.

VET, life-long learning and effective labour intermediation – key to bridging existing skill gaps

o Efficient VET practices and their popularization, as well as further emphasis on lifelong learning are key to ensuring cross-sectoral mobility. This further fosters flexibility on the labour supply side in the face of rapid technological advances and international competitiveness pressures;
o The correct validation of skills acquired outside of formal education systems can only be supportive of labour mobility, and thus can help alleviate one of the causes of skills mismatches – informational asymmetry. This is especially true in today’s context with both learning methods and skill requirements for different occupations changing rapidly with the onset of new economic and social models;
o Our own survey and the ESJS both point to the need of better points of reference that workers and companies can use in order to determine their own skill level or that of their employees. While this may be difficult to achieve in regard to transversal skills (such as teamwork), it may prove useful in terms of ICT, literacy and numeracy skill levels;
o The capacity of ЕU-level information and intermediation services such as EURES should be further increased by the adoption of a more closely integrated approach to government labour market intermediation services. EURES’s dataset should be published as continuously updated open data. This would enable more timely and comprehensive analysis of labour market processes, which may be beneficial to both businesses and policymakers in identifying labour and skills shortages, as well as labour market bottlenecks;
o An in-depth mirror study of the ESJS (a similar study among employers) may be beneficial for the further study of skills mismatches, as there remains the concern that there is no sufficient understanding regarding the actual skill requirements of various jobs on the part of employers.

Broader reforms are also needed

o While there has been significant progress in the design and implementation of EU-wide support mechanisms that aim to increase the overall competitiveness, access to funds, as well as the innovation and internationalization capacity of EU enterprises, some of the underlying structural deterrents to the development of EU businesses are still in place;
o Certain policy-induced sources of skills mismatches can be traced back to slow educational reforms, overreaching labour market regulations, excessive labour taxation and arbitrary wage setting mechanisms. For instance, recent economic and policy developments in countries such as Finland have underlined the importance of flexible wage setting mechanisms as a tool for ensuring international competitiveness and more efficient utilization of the existing skill pool;
o Europe needs to bring the competitiveness agenda back to the centre of the economic and industrial policy debate and addressing skills mismatches is one of the key factors for these policies to be efficient;
o The successful tackling of issues related to skills mismatches require a “whole-of- government” approach which includes both national and regional authorities, educational institutions, social partners, employers and other stakeholders;
o A regulatory and institutional environment that supports the effective allocation of labour resources and thus facilitates the skill demand and supply matching process is an important prerequisite for businesses to adopt new technologies, working processes and business models;
o Smooth labour migration within the EU, as well as targeted migration from third countries, is instrumental in addressing the skills mismatches issue and labour shortages in general.

Chosen excerpts by Job Market Monitor. Read the whole story at Skills mismatches: an impediment to the competitiveness of EU businesses

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