Background to Our Research on Skills Gaps

Friday, July 20, 2012
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There are several competing theories provided by the literature to explain the increase in the relative demand for skilled workers* worldwide. The prevalent demand side theories maintain that expanding international trade ties, skill-biased technological change, or a combination of both forces are the main drivers of this increase**.

From 2000 to 2009, world trade, as measured by the amount of global exports and imports of goods and services as a share of world domestic product, increased by 16.8%, underscoring how much trade has increased over the past decade (World Bank, 2010). Much of this increase can be explained through expanded trade with developing countries. The impact of trade on the demand for skilled labor is in line with the Heckscher-Ohlin Model*** of trade theory and the Stopler-Samuleson**** and the Rybczynski***** Theorems. The Heckscher-Ohlin Model explains how expanded trade increases the incentive of domestic producers to focus on exporting products that utilize abundant and cheap factors of production while importing products that utilize scarce factors. As countries increasingly shift their development policies from import-substitution to export-led growth models, many countries are heavily supporting industry sectors with export potential. This is significant since workers employed in exporting industries tend to be well educated and highly skilled (David H. Autor (Nov., 1998)). Thus, a trade-induced flow of employees from importing, traditionally lower skilled, labor intensive industries, to higher skilled, export-driven industries would increase the overall demand for high skilled workers in economies.

Skill-biased technological change (SBTC) has also been advanced as a main driver for the relative increase in global demand for skilled labor. A major corollary of SBTC is technology-skill complementarity which theorizes that pairing skilled workers with capital has productivity enhancing effects that could contribute to productivity convergence of developing toward developed countries. There is some evidence based on global fixed capital formation that this may be true. From 2000 to 2009, gross fixed capital formation, which includes investments in land improvements, plant, machinery, and equipment, globally grew at a cumulative average annual growth rate of 10% (Bank 2010), representing a flow of US$1.5 quadrillion into capital investments over the past decade. If technological change and capital accumulation of a country favors highly skilled workers and is substitutable for lesser skilled workers, this would likely lower the demand for unskilled labor and increase demand for skilled labor, representing an outward shift in the relative labor demand curve for skilled labor. For example, Autor et al. show that growth in business investment in computers led to skill-biased technological and organizational changes that contributed to faster growth in relative skill demand(David H. Autor (Nov., 1998)). In developed economies, Goos and Manning have shown growth in employment in both the highest-skilled (professional and managerial) and lowest-skilled (personal services) occupations have come at the expense of routine manufacturing and office jobs because technology is increasingly used to perform non routine tasks(Maarten Goos 2009). In developing countries (Sala-i-Martin 1992) find that lagging regions tend to catch up at a real per capita GDP rate of 2 percent per year mainly by absorbing existing technology. Benhabib and Spiegel have found that human capital stock affects the speed of adoption of technology from abroad(Jess Benhabib 1994). Meaning that, as developing countries adopt technology from abroad, the relative demand for skilled labor rises.

Regardless of causality or which theory****** is ultimately more accurate, labor economists agree in general that the demand for skilled labor has increased over time. Globally employers are demanding both higher numbers of skilled workers as well as greater levels of skills competencies from their existing workforce. In many countries, circumstantial evidence points to an unmet demand for highly skilled workers, known as a skills shortage, as well as firms expressing concern that they face internal employee skills deficiencies that limit performance, a phenomenon that has been labeled as a “skills gap.” Skills gaps typically occur due to a lack of or shortfall in soft skills (problem solving, reading, writing, and communication) or technical skills such as familiarity with particular fields of science, engineering, or ICT.

Footnotes

* The term skilled worker has a rather imprecise definition. Many labor force surveys utilize educational attainment as a proxy for a worker’s skill level. Firm-level analyses frequently classify production workers as unskilled and non-production workers as skilled. Krueger (1997) and Slaughter (2000) show that the nonproduction-production classification and educational attainment measures obtain similar results for analyses of data from the United States, and presumably other developed countries. While Gonzaga et. al (2006) maintain that there may be issues with using a production-non-production distinction in developing countries to proxy skill levels.

** It can be shown quantitatively using annual paid employment by economic activity data that demand for skilled labor has grown steadily over the past decade. Based on rather incomplete data on total employment by economic activity from the International Labour Organization for 93 countries, rough calculations show that skilled roles have increased from 1999 to 2008 at a compound annual growth rate of 5.64%. This is a very rough calculation based on increases seen in the International Standard Classification of Occupations (ISCO-88) Groups 1-8 including the armed forces. Unskilled employment, which corresponds to the International Standard Classification of Occupations Group 9, decreased at a compound annual growth rate of -.34% from 1999 to 2008.

***A model of international trade building on the Ricardian model of comparative advantage which posits that countries export products that utilize abundant and cheap factors of production while importing products that utilize scarcer factors.

**** States that an increase in the relative price of a good will result in an increase in return to the production factor used intensively in the production of that good and a decrease in return to other factors of production that is being used less intensively.

***** States a rise in endowment of a factor of production in a country will lead to a rise in production of the good which utilizes that factor more intensively and a fall in the output level of the other good which uses that factor less intensively.

****** There are still other potential interpretations for the global tendency towards employing more skilled labor such as the concept of Tinbergen’s race which theorizes that the market for labor can be viewed as a race between the forces increasing the supply of skills – education and experience – and those increasing the demand for skills required by firms – technological change. The decline of unions, which some maintain strengthen the employment of less skilled workers, has also been advanced as a reason for increasing relative demand for skilled workers. As unionization has decreased, the presumption is that employers have substituted more skilled workers for less skilled, unionized workers who previously were able to demand a wage premium due to their union membership.

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