1. CEET1 Skills shortages: the evidence and the policy response Chandra Shah MONASH UNIVERSITY - ACER CENTRE FOR THE ECONOMICS OF EDUCATION AND TRAINING Paper presented at the CEET Conference Melbourne 29 October 2004

2. CEET2 Industry concerns about the prevalence and persistence of skill shortages in some key occupations, particularly traditional trades Introduction

3. CEET3 A shortage occurs when the demand for workers for a particular occupation is greater than the supply of workers who are qualified, available and willing to work under existing market conditions In practical terms a shortage occurs when employers are unable to fill or have considerable difficulty in filling vacancies (‘hard-to-fill’ vacancies) Definitions

4. CEET4 A skills gap refers to a situation where employers are hiring workers whom they consider under-skilled or that their existing workforce is under-skilled relative to some desired level

5. CEET5 Recruitment difficulties refer to the situation when vacancies exist in spite of an adequate supply of workers, because of relatively low wages being offered, poor working conditions, commuting difficulties, ineffective recruitment effort by the firm or skills needs that are very firm-specific

6. CEET6 Shortage occurs when the demand for particular skilled workers exceeds the number available for work Causes of change in demand –new technology –new products –new workplace arrangements –shifts in the composition of industry associated with globalisation Causes of change in supply –ageing of the workforce –changed attractiveness of particular employment –changes in the numbers entering and completing training

7. CEET7 What do employers mean when they say that they face a skills shortage? Analysis of an employer-based survey of skills and skills shortages show that although many employers equate skills shortages with hard-to-fill vacancies, but a substantial number do not Some employers’ views of skills shortages overlap with that of skills deficiency (gap) or recruitment difficulties Employers’ perspective

8. CEET8 Skill is central to bargaining for wages Small or no wage differential between specialisations can be a cause of shortages Unions may overstate skills shortages to push up wages for new entrants Can stem from a desire to offer better quality services. Closed shops can assist creating scarcity of skills through certification and lengthy periods of training Unions’ perspective on skills shortages

9. CEET9 170,000 people are expected to retire from the trade occupations and only 40,000 being trained to replace them over next 5 years (ACTU and AIG(1)) 130,000 apprentices being trained in manufacturing AIG(1)) In contrast 120,000 net replacement needs over next 5 years (CEET) 26,000 completions in traditional trade apprenticeships in 2004 (NCVER) Skill shortages in trades What is the evidence?

10. CEET10 Based on an employer survey, current national skill shortages are estimated to be between 18,000 to 21,000 for skilled tradespersons in manufacturing (includes positions for machinists, electricians etc but also plant managers and process workers) (AIG(2)) Skilled vacancies 22 per 1000 (but in Queensland 45) (AIG(2)) By far the highest proportion (60%) of employers considered retraining of existing staff as their likely response to skills shortages (AIG(2)) Between Sep 2003 and June 2004 availability of building and construction trades improved by “22 per cent” (HIA) Other evidence

11. CEET11 HIA change in contractor rates Other evidence Sep 2003 to June 2004 June 2003 to June 2004 Bricklayers-14%12% All trades7%13%

12. CEET12 Average full-time wage movements Other evidence YearPROFTRADESAll 1997100 1998104102 1999109108 2000114116114 2001120117119 2002123 2003128129128

13. CEET13 Movers from jobs in year ending Feb 2002 Other evidence Job losersJob leavers PROF3367 ASSOCIATE2575 TRADES4753 All3862

14. CEET14 Movers from jobs in year ending Feb 2002 Other evidence Re-employedUnemployedNot in LF PROF691120 ASSOCIATE721018 TRADES651718 All621622

15. CEET15 Job-to-job mobility in year ending Feb 2002 Other evidence Same Same major Lower skill Higher skill PROF779104 ASSOCIATE6272210 TRADES676216 All56111518

16. CEET16 Some skills imbalances are a feature of a competitive market and real-world markets are seldom perfect Adjustment usually takes time because of the speed at which the information about the changes in the market gets dissipated Public policy should be based on reliable and verifiable evidence Data from interest groups could be useful but it often needs to be cross checked with other sources Lack of good empirical knowledge of how markets adjust, and the time lag between an imbalance being observed and the impact of a policy makes effective intervention difficult in practice Conclusion

17. CEET17 The frequent and loud complaints of a shortage … might be taken as indicating a failure of the price mechanism and indeed have frequently been joined with proposals for interference with market determination of numbers and allocation.…these views stem from a misunderstanding of economic theory as well as from an exaggeration of empirical evidence." K.J. Arrow and W.M. Capron, 1959.