Although we are currently enjoying low unemployment in the UK, if we wish to reduce it further, simply producing more graduates is not the answer, but identifying the skill needs of firms might be. That is the lesson from new research by Gavin Wallis, to be presented at the Royal Economic Society’s Annual Conference on Tuesday 8 April. His analysis of Confederation of British Industry (CBI) survey data on the proportion of firms identifying skills shortages as a factor limiting their output suggests that policy needs to focus more closely on the demand for skills and not simply on educational performance.

Wallis analyses data on the level of skill shortages over the period 1986- 2002 and reveals that skill shortages in the UK economy are raising real wages and reducing unemployment. He estimates that increases in skill shortages can account for increases in real wage growth of 0.4 percentage points and corresponding falls in unemployment of 0.28 percentage points.

When looking at skill levels in the UK, academic and vocational skills, such as A-levels and NVQs, are commonly used. While such measures are useful and indicative of educational progress, they can be limited.

The UK has experienced a major shift in its occupational structure in the past 20 to 30 years, with a corresponding shift in the demand for skills. The demand for skills such as communication and problem solving has increased, while the demand for skills related to manual occupations has declined. Qualifications, although a relatively good indicator of the supply of skills, do not provide a good measure of the demand for skills.

Even though there is still unemployment in the UK, press coverage has reported that there is a shortage of electricians and plumbers. This suggests that those that remain unemployed do not have the required skills for the jobs that are available and outlines the importance of looking not only at educational achievement but also more closely at the demand for skills in the UK.

Identifying the skill needs of firms could therefore be important in reducing unemployment further. These ideas also relate to work that is being done on the possibility that the UK is overproducing graduates, who end up doing jobs that previously did not require a degree.

ENDS

Notes for Editors: ‘The Effect of Skill Shortages on Real Wages and Unemployment: A Simultaneous Equation Approach’ by Gavin Wallis will be presented at the Royal Economic Society’s 2003 Annual Conference at the University of Warwick on Tuesday 8 April.

Wallis is at the University of Warwick.

For Further Information:
Before and after the conference: contact Gavin Wallis on 01480-214582 (mobile: 07811-913284; email: G.Wallis@warwick.ac.uk); or RES Media Consultant Romesh Vaitilingam on 0117-983-9770 or 07768-661095 (email: romesh@compuserve.com).
During the conference (7-9 April 2003): contact Romesh Vaitilingam on 07768-661095 (email: romesh@compuserve.com) or Gavin Wallis on 07811-913284.