3 reasons jobs must come before skills

When I travel to the Balkans for work, the journey typically begins with a cab ride to the airport from my home in Vienna. The taxi company I use is run and operated by Serbs living in Austria. It’s a great company: very reliable, clean cars and friendly drivers who are always keen to discuss the politics and economics of the Balkans. When I arrive in Belgrade, I’m picked up by drivers who have very similar skills to those of their compatriots in Vienna. However, the former have better salaries and opportunities simply because the company they work for operates in an environment that is much more conducive to nurturing and growing a business. In Austria, unlike in Serbia, a company can operate efficiently, is subject to a relatively fair tax treatment and knows the industry standards it needs to comply with. In turn, this explains to a large extent why workers, at any given levels of skills, are more productive in Austria – a basic intuition which William Lewis develops in his book The Power of Productivity, projecting the gains that Mexican construction workers make when moving to the USA.

This does not mean, obviously that skills are irrelevant to the ambition of Western Balkan economies to reach high-income status and join the EU. In fact they matter a lot: including those one acquires on the job and so-called “soft skills”, which are increasingly important in today’s interconnected knowledge world. However, the priority should be to help companies to invest, expand and succeed so that the latent talent that exists today in the Balkans can be exploited in the first place.

There are three main reasons why policy makers in the Western Balkans should focus first on creating jobs before investing in “skills upgrading”:

First, too many skilled people don’t have a job. In most countries in the Western Balkans, less than 40 percent of the adult population has a formal job. This dismal performance (reminiscent of low income developing countries) is not explained by skills shortages, given that education outcomes are almost on par with Eastern European averages.

Second, private firms themselves don’t report skills as a binding constraint. According to the World Economic Forum’s competitiveness indicators, skills shortages were only mentioned in Macedonia as one of the top 3 issues (highlighted by 10.9% of the respondents). In region’s largest economy Serbia, skills was on 14th place (3% of respondents). The main constraints are government bureaucracy, access to finance, corruption, government policies, political instability and tax rates. Indeed, most countries in the Balkans have problematic tax policies – especially the high entry level tax rates – which make it very unattractive to hire workers at the lower bound of the salary scale.

Third, it doesn’t make sense for small economies to try to generate all of the skills they need at home. My second daughter was born in Singapore by a Canadian doctor, who had settled and started her business there because doing so was easy and lucrative. Singapore – consistently at the top of Doing Business rankings – is a perfect example of how small economies can attract the scarce skills they do not have at home by opening up and offering an attractive environment for foreign firms and professionals. The same applies to the Western Balkans, where governments could allow people to move more freely across borders, thereby making it easier for firms – domestic and foreign – to attract specialist skills and in turn unnecessary for those skills to be developed at home (since specialist skills take considerable time and investment to grow). Once skills can flow across borders and are part of international supply chains skills upgrading would happen naturally as local workers learn from colleagues and converge towards international standards. In fact even successful big countries are part of a dynamic international labor market. Take the example of football in Germany, a country replete with good players and coaches. In the German Bundesliga, half of the players and almost half of the coaches come from elsewhere. Their talent and their drive does not take away local jobs but creates more: thanks to the internationalization of football, this sector of the economy is booming creating many more direct and indirect jobs compared to 20 years ago.

International football is also perfect illustration of the “fixed pie fallacy”: the mistaken view that there are only so many jobs available in a given economy. In reality there is always a lot of work to do and the limit, more often than not, reflects the inability of governments to create the right environment for firms to get on with it and push the frontier.

This post first appeared on The World Bank’s Future Development Blog

Author: Wolfgang Fengler is the World Bank’s Lead Economist in Trade and Competitiveness for the Western Balkans.