Are skills really a panacea for unemployment?

The blog I posted to debate with my Bank colleague Wolfgang Fengler the chicken-and-egg question of which comes first, skills or jobs, generated a rich exchange and contributions. While the question was framed around tackling the problem of unemployment in the Western Balkan countries, it naturally applies to almost any country. I want to thank all of those who took the time to write, whether or not they agreed with my main thesis: that countries should invest and strive to develop the basic skills that lay the foundation for the technical or job-specific skills that should be in turn acquired a la par with the changing needs of labor markets.
In arguing this, I was not really addressing the question of whether skills (as opposed to other factors) can be a panacea to high unemployment or labor inactivity. As several commentators observed, unless one has a knack for oversimplification such a question has a simple answer: when it comes to jobs, there are no silver bullets to spark jobs miracles. Rather than a rejoinder, I would now like to reflect on five themes, arising from the comments, which I find most compelling when thinking about the role of skills development in strategies to generate employment.

First, skills gaps can take many forms in the workforce, and educational attainment is a readily available but rather imperfect proxy to assess them. In a first look, the existence of skills gaps in countries like the Western Balkans poses a puzzle. The region fares well in international comparisons of educational attainment, including enrollment in tertiary education. However, as a recent Bank report aptly put it: it is skills not just diplomas that matter. There can be gaps in foundational (cognitive and socio-emotional) skills and not just in technical skills. They can affect differently the flow of future workers—those of school age and youth still in school—and the current stock—youth and middle age and older adults already outside the formal education system. Employers’ complaints about skills gaps reflect their perceptions of inadequacies in the different dimensions of skills among both new entrants and the adult work force. The labor force comprises workers who went through the education system and have acquired or eroded their skills in different times (spanning decades) and contexts. This can result in rather heterogeneous stocks and pathways of skills acquisition. All discussions of skills gaps suffer from a blind spot with regards to the actual skills of the older adult population (educated decades ago). Only recently are these data gaps being systematically addressed under the OECD’s PIAAC surveys (measuring cognitive and technical skills) and the World Bank STEPs initiative (which in addition measures socio-emotional skills).

Second, skills development is very path-dependent and skills investments pay-off in employment at different times.  Skills beget skills: as individuals age, they build on the skills they have already developed. Skills gaps often originate very early in life. Individuals unable to acquire foundational skills at the right time carry a deficit that gets harder to overcome. It takes about two decades for these skill investments to translate into a more productive labor force. In fact, the full pay off to economic and institutional reforms can be reaped by tomorrow’s workers as long as they enter the labor market well-equipped. Technical and job-specific skills investments -acquired through post-secondary education or training- have a much shorter maturity in terms of their employment payoff. For these, it is more imperative to align the supply with the reality of the economy and labor market current and future needs. Some degree of mismatch in these skills is natural and unavoidable in any growing and restructuring economy due to adjustment costs and the delayed response of education and training even in a well-performing labor market. One can make a more compelling argument to curb investment in these skills when the business environment is not conducive to job creation.

Third, skills gaps cannot be expected to resolve naturally through market forces. Skills formation is subject to important intergenerational and agglomeration externalities. These affect the capacity to invest in skills as well as the potential returns to skill investments. Besides schools and firms, families and economic environments have a key role in the confluence of opportunity (attractive returns) and possibility (liquidity, quality schools and home environments) for skills investments. The interaction of family, school and contextual factors (all potentially influentiable by public policies) can result in self-reinforcing mechanisms that inhibit skills formation among low-income groups. There are also externalities arising from interdependencies between private skill investments and broader capital formation, particularly skills agglomeration and technological innovation. Countries or regions with a workforce lacking a minimum skills level are less likely to attract more technology and R&D intensive domestic or foreign investments.  This holds back the growth in the demand for skills and thus the ability to maintain attractive private returns to skills.

A fourth related observation is that while it is possible to boost employment despite significant skills deficits, this is hard to sustain over the long haul. Mismatches in the supply and demand of skills exacerbate as export-led growth gains importance and firms tap into newly developed higher value-added and technology intensive activities. Technological change, through the more prevalent use of ICT, will continue to drive dramatic changes in the bundle of skills potentially demanded in the labor market, especially in sectors and firms closer to external markets and the technological frontier. Coupled with the global change in labor demand, job creation and destruction will impact the demand for skills as firms restructure and turnover and declining sectors (e.g., agriculture) lead way to those in expansion (e.g., services). These trends will impact the labor market prospects of young workers as well as those currently in their 30s and 40s over the next couple of decades. Countries with a labor force better able to perform tasks that complement these technologies have better prospects to offer their citizens better access to the new jobs. The technological and organizational change, trade, and innovation that have taken place over the past two decades have led some prominent labor economists to call this the “human capital century”. The demographic outlook of the Western Balkan countries makes these even more important considerations when diagnosing skills gaps and policies to address them.

The fifth and final point is that one should be cautious about deriving policy priorities for jobs strategies from the importance employers attached to skills vis-a-vis other factors. As noted before, private investment decisions may simply adapt to the available skills endowments in a country. It is the skills requirements of potential new investment that is most relevant. Moreover, even if it may seem natural to ask about the relative importance of factors as distinct as skills, infrastructure, taxes, regulations, or corruption, the policy efforts behind each are strikingly different. How to compare the passage of a law with the efforts to invest large amounts of the budget effectively?. Employers in a country that improved its doing business ranking over a short period of time may well reveal skills to be a more binding constraint. It would be unwise to delay skills investments (especially of foundational skills) until a country has perfected its investment climate indicators or become allegedly competitive.

In conclusion, are skills a panacea for jobs? I do not think so. There is none. Skills are a necessary ingredient of successful long-term job strategies, among many other factors. Should they come before jobs? Again, yes, particularly the foundational skills that lay the basis for further skills acquisition through post-secondary education, training or learning on the job. For aging countries like the Western Balkans, the window of opportunity to invest in preparing youth for tomorrow is closing; the time to invest is now.

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

Author: Omar Arias is Acting Sector Manager and Lead Economist at World Bank.

Image: A man looks at a job board posted at a job fair in Toronto, April 1, 2009. REUTERS/Mark Blinch