What is a skill shortage?(Report)

1. Introduction (1)

A shortage of skills is a source of aggravation to firms, and when acute is likely to hamper the quality and quantity of their output. In a market economy, firms are accustomed to being limited by their capacity to find buyers for their products, not by their capacity to produce those products. When firms have buyers waiting, but cannot produce enough to satisfy the demand because they cannot recruit sufficient skilled workers, they interpret this as a failure of the skills development system. The decline in the overall unemployment rate (at 4.9% in May 2006, it is the lowest for three decades) is causing increasing numbers of firms to bump up against these capacity constraints caused by skills (indeed, labour) shortages. Contemporary surveys of business confidence report that "the availability of suitably qualified employees has remained the number one constraint on business expansion". (ACCI, 2006). But even in times of relatively high unemployment, employers frequently cite skills shortages as one of the business difficulties that they face. What is more, they imply that there is a duty on public policy to come to their aid by somehow reducing such shortages. (2)

The vocational education and training 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. It will be helped in this task if we can give a precise meaning to the term 'shortage'; identify the circumstances under which any such shortage is likely to be naturally and efficiently resolved by market forces; and identify when direct policy intervention is called for to assist the market. VET will be a part of any public policy response. It is the purpose of this paper to set out some clear thinking on each of these issues. I will not attempt to quantify any overall or particular shortage of skills.

2. What Is a Shortage?

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.

"Labour shortages are not easy to measure" (OECD 2003, p.103);

"There is no universally applied definition of labour shortages" (OECD 2003, p.105);