Skill Shortages & How To Address Them Essay

Skill Shortage Defined

The idea of a skill shortage seems clear-cut i.e. the supply of workers is not sufficient to meet the demand at current rates of pay. However, on closer examination ‘shortage’ is a surprisingly slippery concept, as the following quotes demonstrate:

• Labour shortages are not easy to determine. (OECD 2003 103).
• There is no commonly applied definition of labor shortages. (OECD 2003, pp.105).
• … there are no tangible measures or direct indicators of skill shortages. (Alpert & Auyer 2003, pp.1).
• No single practical measure of professional labor shortages exists, nor does it appear that one can easily be developed. (United States Bureau of Labor Statistics 1999, pp.17).

A long-standing definition that appeals to economists is that by Arrow and Capron (1959, pp.307). A shortage is a situation in which there are unfilled vacancies in positions where salaries are the same as those currently being paid to others of the same type and quality.

Yet another definition, expressed in terms of supply and demand, is a market disequilibrium between supply and demand in which the number of workers demanded exceeds the supply available and willing to work at a particular wage and working conditions at a particular place and point in time’ (Barnow, Trutko & Lerman 1998, pp.7).

Each definition focuses on the loss in supply about demand, at the existing wages and conditions. Nevertheless, the concepts of demand, supply, and general conditions are not simple.

Skill Shortage: Introduction

A shortage of skills is a source of stress to firms and, when severe, is likely to impede the quality and quantity of their productivity. In a market economy, firms are familiar with being limited by their capacity to find buyers for their products, not by their capacity to produce those products. When firms have buyers waiting, although cannot produce enough to meet the demand since they cannot employ sufficient skilled workers, they take this as a malfunction of the skills development system.

The drop in the general unemployment rate in Australia (at 4.9% in 2006, it is the lowest for three decades) is causing increasing numbers of firms to put up against these capacity constraints caused by skills shortages. Modern surveys of business confidence report that ‘the availability of suitably qualified employees has remained the number one constraint on business expansion’ (Australian Chamber of Commerce and Industry 2006). Nevertheless, even in times of rather high unemployment, employers commonly mention skills shortages as one of the business difficulties they face. In addition, they mean that public policy must come to their help in some way reducing such shortages.

The vocational education and training (VET) system have an important part to play in assisting with the smooth matching of the skills wanted by employers with the skills offered by workers. It will be helped in this task if a specific meaning can be assigned to the term ‘shortage’ and if the circumstances can be identified under which any such shortage is likely to be logically and capably resolved by market forces. Since VET will be a part of any public-policy response, it is important to make out when direct policy intervention is called for to support the market.

Skills shortages, however, take place for a variety of reasons:

• Strong economy with low rates of redundancy.
• Growth of new industries with few ready skilled tradespeople available.
• Moving of new industries into different regions with a different skills base.
• Lack of interest in particular industries among potential job seekers.
• Location of industry, or project-based work, in rural or regional areas with a small skills base.
• Technology changes within an industry, especially production, resulting in new methods and therefore skills needs and.
• Changes in basic skills need to successfully embark on trade training.

Skill Shortage Strategies

The main mechanism for solving shortages or surpluses in the labor market as elsewhere is the ‘price’. At its simplest, this is the hourly or weekly pay. Nevertheless, it can also include other aspects of the rewards for employment, such as superannuation, significant skills development, childcare, and family-friendly working arrangements. The framework of supply and demand, while basic, is however helpful for thinking about the problem of shortage.

The following are the major ideas relevant for considering shortage, and whether it can be left to the market to determine.

The quantity supplied and demanded should be considered in terms of hours, rather than the number of people. This means that one response to a skill shortage is to increase the number of hours that reasonably skilled people work.

The wage should be considered as the net benefits of working (on the supply side) and the total costs of employing (on the demand side). These will differ as a result of on-costs and income tax. Nevertheless, there are other important differences too, including:

• The amount of training or skills development an employer provides
• The non-financial attractions of the job, specifically, elements affecting the quality of working life, for instance: the physical conditions of the workplace; the extent of flexibility of employee work hours; the intrinsic interest of the work; the intensity of work; support for childcare; job security; freedom from harassment and discrimination; prospects for overtime work at the choice of the employee; whether there is a culture of long hours of work; whether work is expected in unsociable hours
• The prospects of promotion on the job or for using the existing job as a springboard to a better job elsewhere
• The costs to the employer of fitting the new worker into the current work team—including developing their technical and interpersonal skills to the required level and learning local aspects of the job

By increasing the ‘wage’, the supply of hours is increased and the demand is decreased:

• As the desired skills become more costly, firms find ways to reduce their use of such skills, for instance, by using less-skilled people to do some parts of the job or by changing the way work is done.
• Products that need expensive skills in their manufacture rise in relative price and this reduces the amount sold.

The slopes of the demand and supply curves may be steep, or they may be flat:

• The slope represents the responsiveness of supply or demand to a change in the ‘wage’. If they are very responsive, then a small change in wage will cause a big change in the quantity supplied and demanded, and the market is likely to work well in resolving the shortage. The market will not work well if both supply and demand are unresponsive to the wage.
• The slope of the demand and supply curves fluctuates among skill groups; for this reason, each skill market will have its characteristics and needs its study.
• Skills that are easily and quickly learned and are widely used have a more responsive supply; skills that are difficult to learn, take a long time to acquire, and/or are unusual will have an unresponsive supply.

If the wage rises in response to a skill shortage, all of the people who are already employed using those skills will gain, in addition to those recently attracted to such work:

• This is a major reason why firms consider all ways for dealing with a shortage other than raising the wage.

Because they can attract workers away from another employer, individual employers will face a more responsive supply than will the economy as a whole.

A surplus of skill is socially inefficient and individually costly, as is a shortage:

• Creating an oversupply of particular skills is not a capable response to the possibility of shortage.
• An oversupply in one period is likely to lead to a shortage in a future period, as new entrants shun training in a field in which they observe oversupply.

The market for skills that are easily learned will generally sort itself out: the greatest policy and business concern should be for skills that have a long training period and where there is not already a good stock of suitably skilled people who are not using their skills to maximum effect.

There is good experimental proof (for example, Blandy & Richardson 1982) that wages do move in response to shortages and surpluses of particular skills. Nevertheless they do not move much, and many other forms of non-wage adjustments happen to improve the balance between supply and demand.

In understanding how the labor market adjusts to shortages of specific skills, it is helpful to understand that, for many people, the employment relationship is long-term. In 2004, 41% of employed people had been in their current job for more than five years and 24% for more than ten years (ABS 2004). Even though a particular job does not last for a long time, the characteristics of the job will provide both current and future benefits. The most important of the future benefits is the development of new skills on the job. This longer-term prospect generates important insights into how labor markets adjust to shortages and surpluses. The existing wage is only one component of the general benefit from the job. The other main component is its impact on the worker’s future wage path, either with the current employer or in some other job. In deciding whether a job is appealing, a worker will have an eye not just on the current wage, but also one where the job is likely to take him shortly. An important effect of this is that jobs in expanding industries are much more attractive than are jobs in static or declining demand. The former will provide greater job security and confidence in the long-term relevance of the skill. It will also provide prospects for advancement. Jobs in declining demand, even if there are current vacancies, present the opposite future. This helps to understand why people are unwilling to enter the trades, even when existing pay looks good.

There is a second wage-like adjustment that helps to enlighten how labor markets adjust to shortages. This is a variation in hiring standards. Where there is some general apathy in the labor market, when a firm advertises a job, it will receive several applicants. It could reduce the pay on offer until only one person applied. Nevertheless, this is not what essentially happens. Instead, firms use the existence of a pool of applicants to increase the quality of the workers they employ for a given wage. To the worker, this is the equivalent to reducing the pay, since a constant-quality worker will find, when there are surplus workers, they have to apply for lower-paying jobs before they will be placed at the top of the queue. For the firm, the effect of raising the quality of the workers who are hired is also the equivalent to cutting their pay, since they get better quality for their money. Nevertheless, it has the advantage of not disturbing the relative pay rates that at present prevail within the firm. This process also works in reverse. When a particular work moves from a position of surplus workers to a shortfall of workers, then firms will not be able to recruit from an inviting pool of applicants. Instead, they will find that they have to reduce their expectations of the ‘quality of the people they can recruit for the pay and conditions on offer. This acceptance of a reduced quality will, for a constant-quality worker, be the equivalent of a pay increase. It will appear this way also to the firm. Evidence of the importance of quality adjustments in equilibrating the labor market is presented in Blandy and Richardson (1982).

Besides the natural effects that expanding areas have on workers’ expectations of longer-term earnings and the use of quality adjustment by firms, the literature has identified several other ways in which firms adjust to shortages. These include:

• Increasing the recruiting effort
• Recruiting more extensively
• Paying a recruitment bonus to exist employees who find suitable new workers
• Increasing overtime
• Changing production methods to lessen the need for the skill in short supply
• Substituting capital for the skills in short supply
• Substituting new technology for the skills in short supply
• Training or supporting the education of new workers/workers with new skills
• Improving working conditions
• Paying a sign-on bonus (this is better than a higher wage, as it is confined to the recruits)
• Raising wages; however, they: have to be paid to all current workers (including probably many who are not in short supply) are hard to reverse
• Contracting-out the work

Australian Printing Industry: A Case Study

‘The printing industry in Australia is experiencing what one typology of skills shortages classifies as a Level 1 shortage’ (Richardson 2007). Specifically, few people have the necessary technical skills who are not already using them, and there is a long training time required to develop the skills. This type of skill shortage is identified as the most critical obstacle to the expansion of an industry and its firms and the type that requires longer-term planning by the training system. Skill disparities require awareness since they lead to sub-optimal production. They can significantly hold back production, making an industry less viable. ‘While skills shortages are a feature of competitive markets, and skills imbalances often resolve themselves over time, industry and government intervention is often warranted when there is strong evidence that such shortages are impacting upon the competitiveness of a nation’ (Richardson 2007).

Shah and Burke (2003) conclude that: ‘Skill shortages exist at most stages of the business cycle. They can co-exist with low or declining employment growth in an occupation or industry. Although apprentices are a major source of supply in the traditional trade areas, there is increasing evidence of alternative pathways into these jobs, including traineeships. Upskilling of the existing workforce is as important an issue as the training of new entrants into an industry.

Solutions for tackling the problems of skills shortages must be tailored to the needs of the particular industry, although some generic solutions do possibly exist across industries.

Rapid changes in technology mean that training programs need to have continual improvement mechanisms built into their development’.

Notably, for the printing industry, the kind of skills and the speed of technological and marketplace change means that, increasingly, the shelf life of many skills is short. In some cases, there will be skills obsolescence. There is little doubt that further developments in technology will continue to reorganize the printing production process and these developments will likely lessen further the traditional separation between the pre-press, print, and finishing stages of production, thus continuing to make different roles outdated and necessitating the retraining of existing staff. Besides, its apprentices and trainees are feeling this insecurity about the future of the industry. Surveys of students being trained for roles in the industry (for example, Callan & Johnston 2002) show that only about half expect a longer-term future in the printing industry.

The skills shortage in the Australian printing industry is recorded in several locations. Professions from the industry are included in the Department of Immigration’s report on the Skilled Occupation List of Printing Machinists. ‘Printing trades’ are listed in the 2004 National Skills Shortage List on the website of the Department of Employment and Workplace Relations. As well, as noted in the report titled Bridging the skills divide (Senate Employment, Workplace Relations, and Education References Committee 2003), the printing industry is known as an industry that has not been very successful in attracting new apprentices to create sufficient numbers of skilled people. On the whole, there is a commonly held view that there is a lack of skilled people who can assist printing enterprises to respond to current and future market opportunities.

A case study by Ryan and Watson (2003) of National Capital Printing brings to light a typical situation. Printers work 12-hour shifts, while management is on call to assist in problem-solving through any 24 hours. The cyclic nature of the business means lay-offs of staff in January, with re­employment in February. To remain viable, businesses must invest in the most modern technology, although to recover their capital outlays, the companies need to work 24 hours per day. ‘Customer demand is increasingly for shorter print runs and shorter turnarounds’ (see also Deloitte 2005). Customers assume high quality and they expect to be able to bargain on cost, flexibility, delivery time, and a range of value-adding options.

Printing industries in many overseas countries have assumed a strong application on promotion and marketing to schools, including visits and videos on career opportunities (APIS Business Services 2004). Many reports call for a greater focus on the promotion and marketing of career prospects in the Australian printing industry (Callan & Johnston 2002; APIS Business Services 2004). Even though many industry persons and providers in the industry recognize the need for improved marketing of the industry to potential students, across the board there is confusion about the nature of future jobs and opportunities, as the industry continues to respond to quick technological and cultural change. As Saunders (2001) concluded in an assessment of existing research into the nature of apprenticeships and traineeships in Australia, a large number of reports call for the need to reposition the trades in the training marketplace. Besides, in some industries like printing, there is the dual challenge of repositioning not only the trade but also altering perceptions of the industry.

Conclusions

In Australia, there are skill shortages in different business fields. They co-exist with low or declining employment growth in an occupation or industry. Even though apprentices are a major source of supply in the traditional trade areas, there is growing support of different channels into these jobs.

As mentioned above there are some strategies for tackling the problems of skills shortages and these must be customized to the requirements of the specific industry.

References

ABS 2004, Labour mobility, February 2004, cat.no.6209.0, ABS, Canberra.

Alpert, A & Auyer, J 2003, ‘Evaluating the BLS 1988–2000 employment projections’, Monthly Labor Review.

APIS Business Services 2004, Training and education needs of the printing industry now and into the future, Printing Industries Association of Australia, Sydney.

Arrow, K & Capron, W 1959, ‘Dynamic shortages and price rises: The engineer-scientist case’, Quarterly Journal of Economics, vol.73, pp.292–308.

Australian Chamber of Commerce and Industry 2006, Survey of Investor Confidence.

Barnow, B, Trutko, J & Lerman, R 1998, Skill mismatches and worker shortages: The problem and appropriate responses, Urban Institute Policy Memorandum prepared for the Department of Labor, Washington, DC.

Blandy, R & Richardson, S (eds) 1982, How labour markets work, Longman Cheshire, Melbourne.

Callan, VJ, & Johnston, MA 2002, Review of the printing and graphic arts industry and training provisions: Final report, Department of Employment and Training, Brisbane.

Deloitte 2005, A study of the paper and printing industry in Australia, Printing Industries Association of Australia, Sydney.

OECD (Organisation for Economic Co-operation and Development) 2003, OECD employment outlook, OECD Publishing, Paris.

Richardson, S. 2007, What is a skill shortage? NCVER, Adelaide.

Ryan, C & Watson, L 2003, Skills at work: Lifelong learning and changes in the labour market, Department of Education, Science and Training, Canberra.

Saunders, S 2001, Issues and directions from a review of the Australian apprenticeship and traineeship literature, NCVER, Adelaide.

Senate Employment, Workplace Relations and Education References Committee 2003, Bridging the skills divide, Senate Printing Unit, Canberra.

United States Bureau of Labor Statistics 1999, ‘Can occupational labor shortages be identified using available data?’ Monthly Labor Review, pp.15–21.