Skills & levelling up: some fundamentals that are useful to remember

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Foundations of labour

In doing some recent work reviewing some labour market and skills intelligence, I was reminded of some of the fundamental qualities of labour and skills and how these explain a lot of the challenges and issues that we still deal with today in regional and local economies.

If you scratch the surface of many of the issues, complaints and policies for skills – often, these economic features and explanations lie behind them.

So here are my top 10 key economic features of the labour market and skills that help explain a lot of what I encounter day-to-day in the world of local and regional economic development…

Key economic features of the labour market and skills that help to explain a lot of problems and outcomes

1. Labour and skills are a derived demand – and the local skills profile reflects what employers do and what they demand

Employers and businesses need workers to develop and deliver a service, or produce goods. The employer’s end goal is to deliver the service or good in order to derive the value from that – whether that is sales income or delivering a public service or good.

Local skills profiles tend to reflect the local economy and the nature of what is produced there. Not enough skilled workers working in your patch? you’ve not got enough employers who demand high levels of skills. That’s because they are not producing highly value-added services or goods that require such high-level skills.

This can be a challenging paradox for economic developers – to attract or retain the skilled staff, you need the skilled jobs; to get more firms to set up – requires the local labour market to provide the skilled workers. To address this – you have to think big – in terms of building a cluster of employers and of job opportunities and progression – that achieves some critical mass where someone can spend a good part of their career. This is why projects such as Northern Powerhouse Rail (as described on last night’s Panorama programme on BBC) are important as they help provide the connectivity to build density in the labour market (or some call it the effective labour market). There are examples of policies that have successfully developed industry and labour market clusters, such as in Austin, Texas in the USA. This is why us economists bang on about agglomeration benefits from time to time.

Therefore it is useful to ask why employers are engaged in low value-added activities, and what your strategy is for addressing that?

It may be that these employers are unlikely to invest or develop into higher value-added activities. They might be caught in their own low investment equilibrium. Behind every low skills equilibrium local labour market – it’s likely that there is a low investment equilibrium business base or industry. Or maybe some are capable of being helped into higher productivity, higher value-added activities, and you can embark upon a programme of growth business support and assistance.

Or maybe your strategy could be to also attract higher value-added businesses that demand higher skills – whether in the form of high growth start-ups or FDI.

2. To understand future skills needs, employers need to understand their business needs

In an extension of point 1. above – some employers don’t understand enough about their own business, its market, its needs and what it takes to continue to succeed and grow. Some employers can find it difficult to fully understand the current and future skills needs, or plan for and deliver recruitment and skills development. Some employers lack the capacity, capability and/or resources to diagnose skills needs and deliver to them. This has been revealed time and again in 20 years of employer skills surveys. Those 40-50% of businesses with no business plan – usually have no skills plan or budget either. You can’t plan for skills if you don’t know what your business needs are. This is especially the case for businesses that typically operate with less than 25 employees.

So when you ask businesses in your locality about their skills needs – test what that is based on. Is it based on a business, skills or HR plan? If not, then you need to be aware that this isn’t going to be as reliable as a business that has done the sums and made a plan.

3. Skills are portable, and reside with the workers

Skills reside with workers, and can be withdrawn and deployed at the worker’s discretion. Linking to point 1. – if we create skilled workers but there are no skilled jobs locally, but there are 200 miles away in the same country, the skilled workers are bound to leave. This also links to point 5. below that if workers are dissatisfied with pay, progression and working conditions in their current job, they may move to another one.

4. Skills can be difficult to codify and can be a fuzzy concept

Skills can be difficult to codify – they can be attitudes or personal attributes, as much as technical understanding and qualifications. Many employers rank the most important skills as communication and customer handling skills. Others rank technical skills more highly. So when you ask employers about skill shortages, some might mean a shortage of people who can turn up on time; others might mean advanced software programming skills. It’s a good idea to ask more questions about these skills needs and their nature.

5. Recruitment difficulities may be due to poor pay, progression and working conditions that are uncompetitive in the market – as well as simply a lack of available people

Employers and workers tend to operate in an open market, where workers are mobile. Whilst this can facilitate recruitment, it can also lead to competition and not all employers can offer the same terms of conditions. There is a risk that public intervention can distort market competition by subsidising training for some employers who are competing against those with their own internally-funded training investments and approaches.

There are some quite acute recruitment difficulties in many locations in the UK right now. A lot of employers complain that they have a skills shortage – but for some of them, they just can’t get the workers full stop. They are in an industry with an older demographic and haven’t invested enough in recruiting the pipeline of young people over the years. They are finding out it’s hard to reverse this, if they have done little for 20 years, then they are trying to reconnect to an education and youth system which has moved on.

There are some rural areas where there just aren’t enough people. It is unlikely this will be resolved, or that these places will be prioritised for transport improvements. The answers probably lie in changing workforce HR and remote working policies, implementing labour-saving technology, or re-engineering the business to use fewer people.

6. Employers and individuals have imperfect information about skills, qualifications and jobs.

An individual doesn’t always know the value of a qualification, or the exact nature of a job until they participate in this. An employer doesn’t know the skills or value of a candidate or recruit until they are in employment.

Many employers don’t understand the education, training and skills system. Let’s face it – in places such as England, it changes a lot and regularly. This confusion is can lead to employer disengagement. Or some bigger employers get on and do a lot themselves, which us researchers sometimes discover and think – this is fantastic (such as an adult literacy and numeracy scheme I came across in Southend a few years ago).

7. Employers use a range of education and skills providers

A lot of focus in England is on 16-19 FE colleges. Of course, this is important, but employers use other training providers. Some do in-house, and some use private training providers.

Education providers traditionally require long lead times to change education and skills provision. In particular, compulsory education up to the age of 18 is subject to national curriculum requirements. Its sometimes challenging – employers want more agile, modularised courses and provision, but the UK government requires an attainment, usually of a longer-term course qualification to release payment to the college or training provider. Ideally, we should be able to do both.

8. Paying for skills ain’t always straightforward or easy

Skills come at a cost. There’s the cost of the training, and of the bureaucratic effort required sometimes to engage with government-sponsored training schemes. Sometimes this bureaucratic cost is too heavy, particularly for small businesses. This is what has happened since the introduction of the Apprenticeship Levy in England since 2017 – employer take-up of apprentices has fallen by about 1/3 across the country.

In England, post-18 adult skills can be developed but current policies push most of the cost of this onto individuals. As evidence has revealed, there’s not been much take-up of loans. Given the point about information asymmetry, taking on a £10,000 loan when you are supporting a family and paying the rent, when the outcomes are uncertain or may take years to turn into extra salary – this is just too big a risk for many adults. They tend to end up working longer hours in their existing job.

9. The more education people have, the easier they are to train, and the more likely they are to train

Successive surveys and studies have revealed that the more highly educated staff take the lion’s share of training budgets. And that staff with poor basic education, literacy and numeracy struggle to progress beyond entry-level jobs.

This is one of the reasons why I can’t understand why educational improvements at school-age are not integral to the UK Government’s Levelling Up policies and plans or its drive to increase productivity. There is a significant element of adult numeracy from the Levelling Up funds and policies – but why isn’t this extended to literacy and other foundational education – for adults and children?

10. Finally – and crucially, the economy and labour market are dynamic.

They are a series of flows and transactions and are not static. Labour and skills needs and requirements change over time. This presents some significant challenges for employers and education and training providers – to keep track of, and cater to changes in workforce supply, markets, skills requirements, and job roles.

Conclusions

These unique qualities of skills and the labour market often lie behind the causal explanations for the sub-optimal outcomes that we see in local economies.

And folks – buying or assembling reams of data into spreadsheets or interactive dashboards won’t get you these insights. Understanding and interpreting this data and putting it into the context of your local economy and the underlying market and policy environment takes years of hands-on experience to learn.

There are many other nuances, causal connections and dynamics at play. My recommendation – seek a good labour market economist to help you understand them (hint: I know a few!)

Glenn Athey is the Director of Mylocaleconomy, a consultancy firm dedicated to helping local leaders translate their economic ambitions into winning advocacy and solutions that get funded. We are very experienced labour market and skills economists, analysts and strategists, and understand the policy background and context. To get in touch – DM me on Linkedin or email me at glenn(at)mylocaleconomy.org

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