A New Initiative: Adapting to Changing Skills Needs

By Katharine Mullock.

With trends in technology, globalisation and population ageing triggering changing skill requirements in many occupations, countries need to be prepared.  As Stefano Scarpetta, the OECD Director for Employment Labour and Social Affairs, puts it: “If countries are unprepared, these changes in skills demand can lead to skill shortages and unfilled vacancies or to mismatches between the skills possessed by workers and those used in the workplace. This would prevent individuals, enterprises and economies from reaping the benefits of their investment in skills in terms of higher wages, productivity growth and innovation“.  A recurrent theme in this blog has been that devising effective skill policy requires high-quality indicators.  Unfortunately, this type of skill needs data is missing for many countries.  Thanks to the support of the JPMorgan Chase Foundation through its New Skills at Work initiative, the OECD is embarking on a new initiative to fill this knowledge gap by constructing a set of skill needs indicators able to monitor the evolution of skill mismatch and shortages in a comparable way across countries.

To launch this project, the OECD Directorate for Employment, Labour and Social Affairs is hosting a meeting of experts from several countries and fields of expertise today to explore novel ways to measure skill needs.  Participants include representatives from national governments (the United Kingdom’s Migration Advisory Committee, the French Ministry of Employment, the Bank of Spain and South Africa’s Department of Higher Education and Training), academics (Oxford Economics, the University of Amsterdam – Amsterdam Business School) and experts from the private sector (Burning Glass, a U.S. firm that collects job market data in real time).

The discussion will touch on important methodological issues: What are the pros and cons of different proxies to measure skill shortages?  Is the construction of a cross-country indicator feasible?  How can we best aggregate multiple proxies into a single, composite indicator to facilitate analysis?

Several proxies are available to measure the existence and extent of skill shortages. When skills are scarce, markets usually adjust by assigning those skills a higher price. Wage growth by occupation is, therefore, a powerful and commonly-used signal of skill shortages that is available from national labour force surveys.  But complications arise when using this measure to approximate for skill shortages.  Reluctant to raise wages, employers may, in fact, request longer working hours or greater work intensity from existing employees to meet skill needs.  In such cases, one could observe modest or no hourly wage growth, despite the existence of skill shortages.  One way to account for this potential bias is to include measures of work intensity or hours worked in the set of indicators used to assess the degree of skill shortages.

During the Experts Meeting, participants will also discuss the use of employment growth as an indicator for skill shortages, as skill shortages usually go hand in hand with employment growth.   While employment growth by occupation has the advantage of being easy to update with national labour force survey data, this indicator could pose challenges for cross-country comparability.  Employers in countries with stronger Employment Protection and Legislation may be more hesitant to hire new employees even when skills are needed, given they will have a harder time letting them go during slower economic periods.  It is, therefore, important to account for such differences at the country level in order to ensure indicators are harmonized.

The experts gathered by the OECD will also explore the possibility of using vacancy data to measure the extent of skill shortages. Economists usually interpret prolonged unfilled vacancies as a strong signal that employers are having trouble finding workers with the required skills to fill a position at a given wage.  Vacancy duration and job vacancy rates are powerful proxies of skill shortages and, with the help of web-scraping technologies, these measures can be updated on a daily basis for some countries, providing a near-instantaneous picture of pressures on the labour market.  However, there are limitations.  Movement of workers from job to job within the same company (or occupation) generates increased vacancies, which artificially inflates the evidence for skills shortages.  Accounting for these biases with worker turnover data could improve accuracy, provided such data is available.

After debating the strength of these, and other possible proxies of skill shortages, the experts will discuss sensible ways to aggregate these measures into a single, composite indicator.  A composite indicator of this type will be useful for policy-making because it summarizes complex, multi-dimensional information in a way that facilitates assessments of skills shortages.  Hang Ho, Head of Philanthropy for Europe, Middle-East and Africa at J.P. Morgan said, “The main aim of this project is to capture the demand for skills and their supply, so governments, training providers and employers and social partners have access to quality data to inform education policy, workforce programs and training curricula and design. We believe there is a real need for systematic and internationally comparable indicators of skills imbalances and needs, and at the JPMorgan Chase Foundation, we look forward to partnering with the OECD on closing this gap to help inform skills policies globally.”

By informing policy, this new data tool will make meaningful strides towards addressing skills imbalances and skills shortages, so that individuals, enterprises and economies can make the most of their skill investment.