Unemployment
The UK skills gap

No other EC country approaches the UK in its reported shortage of skills: 14% of UK firms reported shortages of skilled labour during 1979-91, compared with 5% for the Community as a whole. Shortages in the UK were concentrated in engineering and in the South East. In a frictionless labour market, such shortages reflect firms' failure to adjust wages, but in the real world frictions prevent firms from filling vacancies by making such adjustments immediately. In Discussion Paper No. 859, Jonathan Haskel and Christopher Martin assume that a reported skill shortage corresponds to a skilled vacancy that has taken a long time to fill, so a skills gap' implies that relatively few suitably qualified searchers are available. Both business survey and econometric evidence support this assumption and suggest that the main cause of skill shortages is the lack of workers with the necessary levels of educational attainment rather than any unwillingness to take unattractive jobs.

Haskel and Martin consider how skill shortages may reduce productivity: first, if shortages lead firms to substitute unskilled for skilled workers, per capita output may fall; second, if shortages improve workers' outside opportunities, firms may be less able to extract effort from them. They estimate these effects on two UK panel data sets for 1980-9: for 81 three-digit manufacturing industries and 33 engineering industries (for which better information is available on the skill composition of the labour force). Their results indicate that the increase in skill shortages over the 1980s reduced productivity growth by about 0.4% per annum (while average productivity growth was about 5%). Shortages of unskilled workers had no effect. The authors also consider how a rise in skill shortages may increase workers' opportunities to find alternative employment and hence to bargain for higher wages. Tests of this effect on both panels reveal that the increase in skill shortages raised nominal wage growth by about 1% per annum (when average wage growth was about 7%). Again, unskilled shortages had no effect.

Skill Shortages, Productivity Growth and Wage Inflation in UK Manufacturing
Jonathan Haskel and Christopher Martin

Discussion Paper No. 859, November 1993 (HR)