Is there really a skills crisis?

Hardly a week goes by without at least one news headline about the ‘skills crisis’.  This week’s example is a Financial Times article on the skills crisis said to be looming in the heritage renovations sector as older experts approach retirement and apprenticeships stay unfilled.

Shortages of skilled people in all sorts of roles are apparently holding back economic growth.  This 2014 survey of employers conducted on behalf of the Prince's Trust is typical of the genre, not least in showing the results you can get from asking suitably leading questions: “Almost three-quarters of employers believe that skills shortages will lead to a significant skills crisis across the UK in the next three years (73 per cent), which would hit the economy and impact on the UK’s ability to compete internationally. Two-fifths predict this will happen within the next 12 months (43 per cent). … More than one in three respondents warn that skills shortages would cause their business to fold (35 per cent)”.  That’s a lot of business failures. 

On the face of it, the results from the 2015 Employer Skills Survey suggest there’s more to the skills crisis than hype and special pleading.  The press release and much of the media coverage focused on the 43% increase in the number of skills shortage vacancies (SSVs) since 2013.  However, this needs to be placed in context.  Recruitment activity was much stronger in 2015 than 2013 and SSVs as a proportion of total vacancies hardly changed (increasing from 22% to 23%).  The proportion of employers with at least one SSV increased from 4% to 6% simply because more employers had vacancies in 2015.  

These figures refer to the number of vacancies that the respondent said were currently open when the survey was conducted.  The increase in the total number of vacancies (42%) was greater than the increase in employment, with vacancies as a proportion of employment increasing from 2.4% to 3.3%.  The report points out that the Office for National Statistics estimate of unfilled vacancies increased by 38% over the same period.

Vacancy growth on this scale is unlikely to be due to employment growth alone; it is consistent with Labour Force Survey data showing that job-to-job turnover is increasing, even if it remains low by historic standards.  It also raises broader questions about the quality of vacancy statistics and how we interpret them.  Much recruitment activity is now online.  This will affect the behaviour of those applying for jobs and those offering jobs.  If it is cheaper and more effective to recruit online, then we’d expect employers to offer more vacancies than they would have done using more traditional channels such as advertisements, the Jobcentre, recruitment agencies or a ‘help wanted’ sign in the window.  It might also affect the ESS respondents’ knowledge of the recruitment process, especially in multi-site organisations.  The typical ESS respondent is the general manager of the establishment or, in larger establishments, the manager responsible for HR.  Will he or she know how many vacancies are being offered at their establishment if there is continuous online recruitment which is run by head office?  Now this might be a temporary problem: it may not be long before the main aggregator websites include the vast majority of all vacancies offered.  But it means we should avoid reading too much into changes over time in the number of vacancies without corroboration from other data sources.   

Skill shortages are often viewed through a macroeconomic lens, as an indicator of whether or not the economy is at risk of overheating, pushing up wages and inflation.  That’s why the Bank of England’s Monetary Policy Committee looks at skills shortages when it tries to judge how much slack there is in the labour market.  Explicit or implicit judgements are made about the quality of the data, its consistency over time and the statistical relationships involved (in this case, the key relationships are between skill shortages and the business cycle and between skill shortages and wage growth).  These judgements can be uncertain or contested, which is why the MPC look at a variety of measures and why the MPC is a committee with external members as well as Bank staff.

Although SSVs increased by 43% between 2013 and 2015, average earnings growth has remained stuck in the slow lane.  Why haven’t skill shortages fuelled wage growth?

One answer might be that SSVs, as a proportion of total vacancies, have hardly changed since 2013.  Despite the rhetoric, they do not appear to be a more pressing problem for employers.

But even if skill shortages had become more widespread, there is no guarantee this would increase average earnings across the economy.

Most vacancies are not problematical.  The ESS found that only a third of vacancies were considered hard to fill for any reason.  This is consistent with data from CIPD’s latest Labour Market Outlook survey.  Employers were asked how many applications they received for their most recent vacancy.  The median number of applicants was 25 for low-skilled roles, 15 for medium-skilled roles and 8 for high-skilled roles.  On average, 38% of applicants were thought to be suitable.  This suggests that employers usually have a choice of suitable applicants for most vacancies – without having to offer more pay.  Furthermore, these results had changed little since the previous year, despite a small increase in the proportion of employers saying they were having difficulties filling vacancies.

In contrast, SSVs are problematical.  Almost all employers with vacancies that were hard to fill solely because of skill shortages reported one or more negative consequences.  Employers might react by raising the wage offered in order to attract skilled recruits, but this doesn’t mean they will necessarily award a matching pay rise to existing employees.  Higher pay may be masked by the use of non-wage benefits, one-off payments, bonuses and allowances.  Or employers might rely on the   culture of pay secrecy thought to be common in the UK.  If employees don’t know the starting salaries of new colleagues, it’s hard to demand a raise.

Employers with SSVs also have other options.  If people with the skills required are expensive and hard to find, employers could instead invest in developing the skills of existing employees, although poaching then becomes a risk.  Efforts to recruit from outside the UK could be intensified, particularly if some of the skills thought to be in short supply here are more plentiful elsewhere in the European Union.  Alternatives to direct recruitment might be considered, such as sub-contracting, freelancers, and recruitment agencies.  The emergence of online crowdsourcing platforms could in some cases provide additional options.  Employers may also decide that doing nothing is sometimes the best option.

It may therefore be time to tone down the rhetoric.  A lack of skilled people might already be constraining the ambitions of some organisations, but the wheels of the economy are not about to fall off.  Nor are these pressures going to push up overall wage growth by a significant amount; at most, any impact will be localised.

This doesn’t mean that skills are unimportant.  The skills of the workforce, and how well those skills are utilised, are key to our long-term prosperity.  Last Thursday, saw publication of both the ESS results and the OECD skills review of England.  According to the OECD, 9 million adults of working age (over a quarter of the total) have low levels of literacy or numeracy (or both).  That means not being able to perform tasks such as understanding with accuracy the instructions on a medicine bottle or not being able to understand a petrol gauge and perform simple calculations.  Whereas other countries have seen progressive increases in the competence of each generation, this has not happened in England (and the USA).  Over a fifth of 16-19 year olds have low literacy skills (bottom for the 23 countries where data are available) and over a quarter have low numeracy skills (second to bottom, only the USA does worse).  A lack of basic literacy and numeracy is not confined to those with few qualifications.  England is ranked third from bottom for the percentage of university students with poor literacy and fourth from bottom for poor numeracy.

The OECD show that poor literacy and numeracy is associated with weaker economic prospects and other aspects of well-being.  The study also reminds us that qualifications do not always translate into competence.  Some individuals who think they are over-qualified lack basic literacy and numeracy.

These are areas where the UK has under-performed for decades.  Turning this around to improve our relative performance will be an equally long-term task, which suggests the need for a broad political consensus on priorities and system changes, so they can survive changes of government and become embedded.  No small job, and absolutely vital, but one unlikely to be helped if Corporal Jones is cheer-leading.

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