Analysing the nation’s skills problem
11 Sep 2023
Daniel Muir, Research Economist (Fellow)
This blog was originally published on the website of Adzuna, one of the largest online job search engines in the UK.
Whilst economic inactivity (defined as not being in employment and not seeking work within the last four weeks and/or not able to start work within the next two weeks) has been largely falling since its late summer 2022 peak, it appears that this is feeding through into higher unemployment (i.e., seeking a job but not entering one) more so than it is into higher employment (i.e., entering work).
There are also signs that short-term unemployment is starting to lead to longer-term unemployment. i.e., less so a feature of a dynamic economy where individuals transition between roles and more so a feature of issues with an individual’s employability and the type of work that is available to them. It also appears that this growth in longer-term unemployment is being driven in particular by younger people, who may not have the experience to move into higher skilled jobs straight away.
Furthermore, wage growth is running at well above the rate of inflation in many ‘white collar’ industries, and the public sector is falling behind and struggling to fill its jobs – these are areas where employers are more likely to need higher level or job-specific skills.
This all suggests that we are experiencing significant mismatches between labour supply and demand, and that this is about shortages of specific skills and not just labour as a whole.
Key areas of challenge
The shortage occupations list identifies occupations that are facing particularly significant skill shortages. The Migration Advisory Committee periodically recommends to government which occupations should be on the list, with their methodology based on qualitative evidence received through stakeholder engagement as well as four quantitative indicators: change in real median hourly pay; change in total hours worked by all employees; number of potential workers previously employed in occupation now not; online vacancies per 100 employees. This data collected can be found here.
As a basic exercise to demonstrate the issues faced, below we look at the number of employees per vacancy across the shortage occupations compared to all occupations. The shortage occupations list is based on the UK 2010 Standard Occupations Classification, although the Standard Occupations Classification (SOC) has subsequently been updated to the UK 2020 SOC. We look at the UK 2020 SOC occupations that best match to the UK 2010 SOC occupations on the shortage list. Those roles highlighted in yellow either do not translate perfectly from one classification to the other. Additionally, instances where there is only a shortage in a subset of the occupation (for instance, for 2111 Chemical scientists only jobs in the nuclear industry are deemed as being in shortage) are also highlighted. The employment data we use comes from the Annual Population Survey covering January through December 2022, and the vacancy data (covering the same period) comes from Adzuna’s intelligence portal, the proprietary dashboard that displays a wide range of aggregate statistics based on all the vacancy listings Adzuna holds on their site.
Across 2022, employment averaged nearly 33 million and there were nearly 20 million unique online job postings, giving a number of employees per vacancy (a simple way of measuring how potential supply matches up to unmet demand) of 1.65.
We highlight in red instances where a shortage occupation has a lower employees per vacancy figure i.e., where occupational skills shortages based on these figures are greater than average across the labour market as a whole.
Interestingly, more of the deemed shortage occupations have a higher than average employees per vacancy figure than have a lower one. This does not mean that the shortage occupations have been poorly identified – as a wider range of factors are considered much more thoroughly than has been done so in this simple exercise, and certain features of the datasets used in our exercise might affect the findings. Instead, we argue that these figures are best used to highlight particular instances in these data where the supply of skills is simply not keeping up with demand. 2134 Programmers and software development professionals; 2141 Web design professionals; and 2451 Architects are occupations where the total number of vacancies was higher than average employment across 2022 – the simplistic interpretation of this is that for these occupations the workforce needs to more than double in size to meet demand, although it’s a slightly more complicated issue than this.
Whilst having a certain level of vacancies is necessary for a dynamic economy, these rates demonstrate the chronic skills shortages faced in certain areas of the labour market.
Looking to the future
Not only are we facing serious skills shortages which are affecting employment, output, growth and inflation in the present day, but changes to work and the economy over the coming years are likely to exacerbate these issues as well as leading to new areas of shortage.
This previous blog by Adzuna looked at trends in skill demand using their vacancy data since 2016, which could be leveraged further to think about future skill needs. One of the best sources of information on the skills that we will need in the future is the Working Futures series, the most recent iteration of which is the Skills Imperative 2035.
Technological advancements, including AI, will lead to job losses concentrated in certain blue collar manual occupations and less skilled white-collar non manual occupations, whilst also leading to new opportunities in the service sector that require technological and digital skills. Additionally, this will also further the skill premium as both new and higher level skills will be in greater demand, thus increasing the difference in labour market outcomes between those that do and do not have them. So, our skills systems need reforming to deal with both the shortages we face today as well as those we will face tomorrow.
Solutions
How then can we frame the issue to better think about potential solutions? The supply of skills in the labour market can be thought of in terms of stocks and flows.
The stock constitutes the current skills picture – the quantity of skills held by the workforce. This is split across regions and across demographic groups. The current skills shortages we are facing suggest that this stock is not fit for purpose. We do not have a sufficient quantity of certain skills across the nation to fill vacancies and provide the quality and quantity of services that the population needs and also the skills we do have may be in the wrong place
Geographic redistribution
The extent to which the stock of skills is adequate varies by region. This analysis by Nesta looks at the supply of various skills across the largest urban areas in the UK and highlights cases of certain urban areas that have a surplus of skills. For instance, Belfast generally has a far greater supply of engineering skills (an area of shortage as is seen by the number of engineering occupations on the shortage occupations list above) than other large urban areas in the UK. Note that this research doesn’t then link this relative supply to relative demand – Belfast might have a relatively high supply of engineering skills because of its’ industrial mix.
Further research is required to understand the balance of demand for and supply of skills by area. In cases where areas face shortages in a certain skill (considering both supply and demand) whilst other areas have a surplus, outcomes (in terms of the economy) would be improved by a relocation of individuals with these skills from the surplus to the shortage areas.
Naturally individuals cant be forced to relocate in the name of social good, and there will be a wide range of factors behind their choice of where to live and work –see this IES report investigating social mobility and the reasons as to why individuals stay in or leave certain areas. There are market mechanisms that will incentivise this relocation: in theory, wages will rise for roles requiring these skills in the shortage area relative to the surplus area, incentivising individuals to relocate. And government policy can also play a role by removing other barriers to social mobility – increased investment in infrastructure and transport to lessen the burden of commuting between areas, for example.
Flexible working
Employers can also be doing more, in particular by offering flexible and/ or remote workplace models. There is widespread evidence that the demand for remote and/ or flexible working arrangements outstrips their availability. Increased availability of remote and/ or flexible working arrangements, especially in regions where this is particularly lacking, will support geographic mobility and the equalisation of relative skills shortages and surpluses between areas.
Underused shortage skills
Additionally, in some instances shortage skills might be present in the workforce but might not be being used in the occupations facing shortages in the skill. Think for instance of the cliché that a lot of STEM students end up working in finance (see this study as an example of some of the research into this from the US), despite the fact that several of the occupations on the shortage occupations list are STEM-related. This occurrence is almost unavoidable – the reputation of (rightly or wrongly) and types of transferrable skills developed by students with STEM degrees combined with the economic resources that firms in the finance industry have at their disposal, will see students that place a high priority on finances move into roles that do not directly utilise their shortage hard skills. More work is required to understand what can be done to prevent the leakage of these shortage skills to unrelated non-shortage occupations and industries.
Population growth
Where it is perhaps easiest for government to influence the supply of skills however is the flows into and out of the stock, at both the bottom (i.e., the pipeline from the education system) and sides (i.e., through retraining workers and immigration). Historically, the UK has been able to solve labour shortages through increased supply – through population growth including via immigration, and increased labour market participation amongst women and other groups. However, population growth has somewhat slowed in recent years as the population has aged and the fertility rate has declined, and the growth in the female employment rate has also slowed.
Since Brexit there has also been a fall in the inflow of migrants from EU countries which has been a key source of labour in certain occupations and industries. Put this all together, and employment growth is set to halve in the coming decades.
Skilled Worker visas are one solution to solving skills shortages via increased immigration. However, these only lower the salary requirements to migrate to the UK. Normally to qualify for the visa you would need to be moving into a job with a salary above £26,200, however if your occupation is on the shortage list then this requirement is dropped to 70-90% of the usual going rate for the role. This won’t increase the positive incentives to seek employment in these roles in the UK: given the job packages as a whole available in these roles internationally (think of the stories about junior doctors moving to Australia and other destinations where the salaries are higher and the lifestyle is appealing), the incentives to work in these roles also need to increase (such as through pay rises and tax breaks) in order to solve these issues.
Reforming the skills pipeline
Reforms of the pipeline of skills from the education system are also required. This itself is a huge topic, which we cannot do justice to here. So we focus on just a few potential areas for reform/ development. Initiatives such as local skills improvement plans (LSIP) which aim to better align the output from the local skills pipeline with the needs of local stakeholders including employers are welcome. IES has been performing research to inform the LSIPs of sub-regional bodies covering London: robust evidence is a necessity to support policy making so that we can solve the skills problem.
A greater focus on skills of the future, and a better understanding of what these are by leveraging data such as an O*NET database for the UK that is currently being developed, would help solve potential shortages in the future. These data-coupled with research-backed career guidance and pathway resources would help. An example of a valuable pathway tool is the Institute for Apprenticeships & Technical Education’s occupational maps. This helps those considering these forms of vocational training understand what career pathways their chosen course would best lead to.
Apprenticeships
Apprenticeships, which can be designed with current and future skills shortages in mind, are also key to increasing work-based learning for all working age individuals. Research has also shown that apprenticeships are effective, with high numbers of employers reporting that apprenticeships have contributed to the development of skills relevant to their organisation and increased productivity. Take up remains low however, with the programme of largely the same scale (in terms of new starts) now as it was a decade ago. The Apprenticeship Levy, which is paid by large employers and helps fund courses, could be reformed to allow employers to draw down funding directly for shorter-term training for new recruits, increasing flexibility and the programme’s ability to help fill current skill shortages more quickly.
Training & upskilling
Apprenticeships are not the only solution – they require a large investment of time that may not suit the needs of all people in the labour force. Skills Bootcamps, introduced in England in 2020 to help deliver sector-specific skills, are a shorter, more flexible alternative which involve employers in the design of the course. Forthcoming research by IES, funded by the Gatsby Charitable Foundation, is investigating what the Skills Bootcamps deliver and how far this articulates with provision elsewhere in the English skills system.
Employers also need to invest more in training their workforce themselves – only around 25% of employees/ the self-employed reported in 2019 that they had received training in the previous three months, compared with around 30% in 2005, and training is often geared towards induction and health and safety. Increased funding for and uptake of training opportunities such as these will be key to solving our current and future skills needs.
Written by Daniel Muir (Research Economist) with support from Becci Newton (Director, Public Policy Research) and Emma Pollard (Principal Research Fellow), IES.