Tackling a glaring problem in the jobs market - The Centre for Independent Studies
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Tackling a glaring problem in the jobs market

graph_skills_mismatchHow can Australia best tackle the skills mismatch challenge?

The best solution lies in public policy with a more market-oriented approach, focused on foundational skills rather than just dictating trade skill.

New data analysis of unemployment and job vacancies suggests a growing mismatch between supply and demand for skills in Australia’s labour market, making it more difficult for jobseekers to get back to the workforce.

The higher a skills mismatch — the misallocation between the attributes jobseekers have and the ones required by employers to fill vacant positions — the longer a job position will remain open.

The chart below shows a clear structural break in the interplay between job vacancy and unemployment rates for two distinctive periods in Australia’s recent economic history. The first cloud of points (in blue colour) refers to the quarterly data prior to the Global Financial Crisis, from 2003 to 2008, which constituted the best job market outcomes in the last 30 years; whereas the other cluster of points (in red) portrays the period after the GFC.

The indisputable — and concerning — outward shift of the trend lines after 2008 represents a worsening in Australia’s labour market; and a growing mismatch between jobseekers and potential positions.

There are many forces at play behind the shift. A deterioration in job search matching is not unusual after an economic crisis. For one, businesses are often more reluctant to fill vacant positions, due to economic uncertainty.

Yet another corroborating reason could be skills mismatches in the labour market. As a result of difficult times, many companies are forced to downsize, or simply shut down; sometimes even entire industries collapse — witness car manufacturing in Australia. In the process, workers with a particular skill set are laid off and cannot quickly enough learn new ones required by existing vacant positions.

Economists generally believe the labour market adjusts to such imbalances, especially over time. However, the persistence of the current misallocation might point to a bigger phenomenon at play: the very nature of modern jobs are changing.

A service-oriented, highly specialised economy, such as Australia’s, with increasing degrees of automation and information systems, requires a new breed of workers to perform an ever-challenging set of tasks. Additionally, high job turnover rates discourage firms from investing in on-the-job training. All these factors lead to a wider gap in the supply and demand of skills in the labour market.

Nonetheless, as unemployment rates rise and business groups bemoan talent scarcity, governments are compelled to act.

An efficient approach would be to remove the current hindrances that prevent the free market from curing its own imbalances. Instead of politicians fiddling with guesses about which occupational skills are scarce — vowing to splash unreasonable amounts of funding in STEM subjects, for example — it would be better to improve the efficiency of schooling, with a focus on foundational skill learning rather than content learning.

Aiming at measurable indicators, such as the PISA international results on numerical literacy, reading and problem-solving skills (in all of which Australia has regressed in recent assessments), can be part of a sensible and more flexible solution — as research suggests that an expedient increase in the PISA score could propel Australia to the top competitive countries in the world.

The reason for our undersupply of STEM graduates is not the lack of incentives, not even the alleged ‘lack of coolness’ of these subjects; on the contrary, high salaries for ICT careers are common. A much more compelling explanation for low STEM graduates is that these subjects are hard to learn, and many of our school-leavers are not in a position to acquire these new skills, without first acquiring foundational skills.

Such educational impairments are the main hurdle behind the inability of the market to equalise demand and supply through price signalling (i.e. higher wages). Hence, by empowering Australian workers with solid foundations they can build upon to learn other skills (rather than dictating what content to learn), mismatches will tend to have a shorter lifespan — whatever the skills demanded in the coming future may be.

Back to the basics: the effective solution to skill shortages.