What is a skill shortage?

The vocational education and training (VET) system has an important role to play in assisting with the smooth matching of the skills wanted by employers with the skills offered by workers. This report looks in detail at the meaning of supply of and demand for skills in the Australian labour market, focusing in particular on the way in which skill shortages are identified and addressed.

This report is part of the larger research program, A Well-skilled Future: Tailoring VET to the Emerging Labour Market.

• While the term ‘skill shortage’ seems to be clear and unambiguous, in reality it is a slippery concept with many meanings. For a shortage to occur, it is necessary for the demand for a particular type of worker to exceed the supply of such workers, but the notions of supply and of demand are themselves quite inexact.

• Employers look for many qualities in a worker, beyond the technical capacity to complete the required tasks. When workers are abundant, employers develop a high expectation of the level and range of qualities that new workers should possess. When workers become scarce, employers are forced to accept workers with lesser qualities (such as relevant experience, personal presentation and willingness to work flexible hours). Employers experience this as a shortage of suitable workers.

• The normal operation of the labour market, including variations in the wages and conditions of the job, will deal satisfactorily with many types of shortage. But it will not work well if there are few people with the required skills who are not already using them, and it takes a long time to acquire such skills.

• We suggest the following scheme for classifying skills shortages:
  • Level 1 shortage
    There are few people who have the essential technical skills who are not already using them and there is a long training time to develop the skills.
  • Level 2 shortage
    There are few people who have the essential technical skills who are not already using them but there is a short training time to develop the skills.
  • Skills mismatch
    There are sufficient people who have the essential technical skills who are not already using them, but they are not willing to apply for the vacancies under current conditions.
  • Quality gap
    There are sufficient people with the essential technical skills who are not already using them and who are willing to apply for the vacancies, but they lack some qualities that employers consider are important.
• There is no simple reliable measure of the existence of a skill shortage. It is necessary to draw on a range of indicators, as is done by the Commonwealth Department of Employment and Workplace Relations. The most important component of these indicators is the time taken to fill vacancies for the skill in question.

This report is a component of the research program entitled A Well-skilled Future: Tailoring VET to the Emerging Labour Market, in which the evolving labour market and changing work organisation and management in the context of the vocational education and training (VET) sector are examined. The research has been undertaken by a consortium of researchers from the National Institute of Labour Studies and the Centre for Post-compulsory Education and Lifelong Learning of the University of Melbourne.

A shortage of skills is a source of aggravation to firms and, when acute, it is likely to hamper the quality and quantity of their output. The vocational education and training (VET) system has an important role to play in assisting with the smooth matching of the skills required by employers with the skills offered by workers. A timely response from the VET system with the supply of skills will be assisted by an understanding of how the market operates. The sector will be helped in this understanding if the term ‘shortage’ can be precisely defined and if the circumstances can be identified under which any such shortage is likely to be naturally and efficiently resolved by market forces. Since VET will be a part of any public-policy response, it is important to recognise when direct policy intervention is necessary to assist the market. It is the purpose of this report to set out some clear thinking on each of these issues. I will not attempt to quantify any overall or particular shortage of skills.

Skill shortages can have many causes. These include: a general under-investment in skills development; rapid structural change combined with low levels of overall unemployment; a cyclical surge in employment in a part of the economy; and particular spots of weakness in the training system. In all likelihood, the shortages seen in 2006 are a consequence of all of these. Employers might also find that they are unable to attract the workers they want because the pay and working conditions on offer are unattractive. This will feel like a shortage to the employers concerned, even if the labour force as a whole has an adequate supply of the skills in question.

The idea of a shortage seems straightforward: the supply of workers is not sufficient to meet the demand at current rates of pay. But on closer inspection ‘shortage’ is a surprisingly slippery concept. To quote the United States Bureau of Labor Statistics, ‘… there are no objective measures or direct indicators of skill shortages’.

The supply of workers with a particular skill is difficult to measure for several of the following reasons.

• What is important is not just the number of people, but also the number of hours they are willing to work. While some people work long hours, many others work part-time.

• Within an occupation, there may be specialised sub-sets of skills or locations having difficulty recruiting, while other areas are not.

• As noted above, vacancies may go unfilled, not because there is no one available who can do the job, but because the wages and conditions on offer are unattractive.

• Within every skill group, there is a range of ability—from exceptional to ordinary. This variation in quality is important to employers, but not observable in measures of labour supply.

• Many people work in jobs that do not directly use their formal qualifications; alternatively, they may be of working age but are not seeking employment.

From this we can see that it is possible to increase the supply of a particular skill in a number of ways. These include: increasing the hours worked per worker; increasing the proportion of people who are qualified for an occupation who actually work in the occupation; and increasing the intensity of work and the efficiency with which the scarce skill is used. Increasing the number of people recently trained in the skill (for example, through vocational courses) is only one way to increase supply.

The following scheme for classifying skills shortages is suggested:

• Level 1 shortage:
  • There are few people who have the essential technical skills who are not already using them and there is a long training time to develop the skills.
• Level 2 shortage
  • There are few people who have the essential technical skills who are not already using them, but there is a short training time to develop the skills.
• Skills mismatch
  • There are sufficient people who have the essential technical skills who are not already using them, but they are not willing to apply for the vacancies under current conditions.
• Quality gap
  • There are sufficient people with the essential technical skills who are not already using them and who are willing to apply for the vacancies, but they lack some qualities that employers consider are important.

The definitions of shortage need to make an additional distinction. This is between workers who do not have the essential technical skill, on the one hand, and workers who are judged not to have the degree of motivation and other personal characteristics that the employers desire, on the other hand. To illustrate, suppose that Australia has sufficient qualified automotive technicians to fill all the vacancies and they are willing to apply for the available jobs. However, there are not enough who are self-motivated, versatile and willing to work overtime to meet employers’ requirements. Is there a shortage? If there is, it is of a form different from the absence of specific skills and less easily within the reach of the VET system to address.

In many cases, but not all, we can reasonably leave it to the labour market to sort out the problem of shortage. There is no fixed quantity of any particular skill supplied to the economy, nor is there a fixed quantity demanded. Rather, supply will rise as the terms of employment become more attractive. And demand will fall as the costs of employing people with particular skills rise. But the market will not work well if both supply and demand are unresponsive to wages and other conditions of employment.

The wage is not the only aspect of employment that works to correct a shortage (or a surplus). When a particular occupation moves from a position of surplus workers to a shortfall of workers, then firms will not be able to recruit from an attractive pool of applicants. Instead, they will find that they have to reduce their expectations of the ‘quality’ (including perhaps the motivation, initiative, experience, presentation etc.) of people they can recruit for the pay and conditions they are offering. This acceptance of a reduced quality will, for a constant-quality worker, be the equivalent of an increase in pay. It will also appear this way to the firm.

Clearly, Level 1 shortages will be the most severe obstacle to the expansion of firms, and it is these which require longer-term planning within the training system. This planning is required to anticipate skills needs as far as this is possible and to ensure that the system has the necessary capacity to provide the required training. Where it takes only a short time to acquire the necessary skills (for example, Certificate III in Aged Care) and many people have the ability to learn these skills, then the normal adaptation mechanisms of the labour market are likely to work quite well to ensure that any shortage does not persist.

A market economy is a dynamic institution. Firms and their jobs are constantly being born, expanding, contracting and dying. Each year about one in five workers ends a job they were in. It is inconceivable in such an environment that there will be a continuous and precise match between the types of skills that are required and the types of skills that the workforce has to offer. When there are sizeable levels of unemployment, under-employment and non-employment, much of this inevitable imbalance is hidden from the notice of firms. With a few exceptions, employers find that, when they advertise a job, a number of people with the relevant skills apply. They are then able to look for additional qualities, such as precise relevant experience, desirable personal qualities, and evidence of enthusiasm and potential commitment to the firm. From the employers’ perspective, the skills system therefore seems to be working quite well. However, the consequences of the imbalance are borne by workers, who cannot find employment that uses the skills they have laboured (and paid) to acquire. As the overall labour market tightens, the structural mismatch between skills and job requirements becomes more apparent to employers. It is then that we start to hear about skills shortages, and the extent of the mismatch becomes an issue of policy concern. These periods of high overall labour demand when skills mismatches come to the surface provide a valuable opportunity to evaluate the total skills development system for its capacity to be responsive to the needs of both employers and workers.