Skill Shortages: Prevalence, Causes, Remedies and Consequences for Australian Businesses. NCVER Monograph Series 09/2012

Although skill shortages are often portrayed as a significant problem for the Australian economy, there is surprisingly little evidence about their prevalence, causes and consequences. It is difficult to find robust evidence about where skill shortages occur, why they occur, what businesses try to do about them and whether their responses are effective. A severe barrier to understanding skill shortages has been the absence of representative survey data linking the observation of a skill shortage to the characteristics, behaviours and subsequent performance of the businesses that encounter them. The quality of policy responses to current and emerging skill shortages has been diminished by the haphazard nature of previous data collection and analysis. The aim of this report is to improve understanding about the phenomenon of skill shortages, by using robust econometric methods to analyse an important new dataset: the Business Longitudinal Database (BLD), maintained by the Australian Bureau of Statistics. This database is an ongoing panel survey of small to medium-sized businesses containing information from two sources: a mail-out questionnaire completed annually by responding firms and administrative data taken mainly from the records of the Australian Taxation Office. The basis of this report is the first panel of the Business Longitudinal Database, which contains information for a sample of approximately 2700 firms with fewer than 200 employees, commencing in the 2004-05 financial year. Central to the analysis in this report is the set of questions on skill shortages that were asked to firms on the 2004-05 questionnaire in the first panel of the Business Longitudinal Database. Respondents (generally the owner or senior manager) were first asked whether the business had skill shortages during the year, to 30 June 2005. A "skill shortage" was defined as an: "insufficient supply of appropriately qualified workers available or willing to work under existing market conditions". Businesses that answered "yes" to this question were then asked two follow-up questions about the causes of the reported skill shortage and their responses to it. In both cases, multiple-response options were listed on the survey questionnaire, with the instruction that respondents should select all factors that applied; they could also specify any "other" factors not listed. The responses to these three key survey questions are the basis of this analysis. The information that firms provided is used to: investigate the incidence of skill shortages; identify the main types of skill shortages reported; determine which business characteristics are most strongly associated with the propensity to report having skill shortages; count the number of different skill shortage causes reported by each firm and thereby identify which have more or less complex shortages; explore the relationships between the varieties of skill shortages and firms' responses to them; and examine whether firms with and without skill shortages perform differently on measures such as sales and investment during the three-year observation period currently available in the database. A strong theme recurring throughout this report is that skill shortages are multifaceted and complex labour market phenomena. We argue against the conception of skill shortages as a homogenous or uni-dimensional problem and favour a more nuanced interpretation that distinguishes skill shortages with simple causes from those with more complex causes. Complexity matters, both in terms of how firms respond to skill shortages and their implications for short-term performance. Simpler skill shortages--those associated with a single cause--are a marker of firm success. They have benign performance implications, are less persistent over time and are typically resolved through internal management practices, such as increasing the hours worked by existing staff. By contrast, complex skill shortages--those attributed to multiple causes--have more ambiguous effects. Firms that contend with these complex skill shortages are more likely to respond by reducing their outputs or production. These skill shortages are also more likely to be persistent, in the sense that the affected firms still report a lack of skilled persons one or two years later. While the data do not allow us to confidently identify the causal relationship between skill shortage complexity and firm performance, we argue that there is likely to be a two-way process taking place, whereby firms with complex skill shortages encounter performance difficulties that in turn erode their capacity to correct the skill shortage. Appended are: (1) Descriptions of main estimation variables; (2) The skill shortages question: is non-response in the data random?; and (3) Sample sizes and statistical significance. (Contains 28 tables and 23 footnotes.)