Skills Shortages: Concepts, Measurement and Implications. Working Paper No. 52

Despite wide publicity and common usage, the concept of skills shortage has different meaning to different people depending on their perspective. Understanding the different concepts of skills shortages, their measurement and the causes of skill shortages is important if sound policies are to be developed in the areas of employment, education, training and skill formation. This paper aims to contribute to an understanding of the issues. It provides a context for the study by considering recent reviews of skill needs and an overview of the meaning of skills with particular attention to generic skills as well as more vocational skills. Economic theory suggests that some skills imbalances are a feature of a competitive market. Without major hindrances to the market adjustment process, these imbalances resolve over time and may not require intervention. The main drivers of the changing skills requirements are demographic, organisational, social and technological. Adjustment usually takes time because of the speed at which the information about the changes in the market gets dissipated and the time it takes an individual to acquire new skills. However, real-world decentralised labour markets may not lead to optimal allocation of resources. Government action to correct the market may be justified if there is strong evidence showing sub-optimality. Before any effective policy is designed and implemented, it is important to understand the operation of the current market and to investigate reasons for its failure. Lack of good empirical knowledge of how markets adjust, and the time lag between an imbalance being observed and the impact of a policy makes effective intervention difficult in practice. (Contains 6 footnotes and 3 figures.)