The Skills Gap: Is it a myth?

This is the fifth briefing paper in the Global Perspectives series, a collaboration between the Social Market Foundation and the University of Warwick’s Centre for Competitive Advantage in the Global Economy (CAGE).

Concern is growing in advanced economies, and in particular in the UK, about the ‘skills gap’: the ‘growing gulf between the skills workers possess today and the skills businesses say they need’ (Economist Intelligence Unit 2014). The concerns are often focused on shortages of workers with skills in the science, technology, engineering and maths (STEM) subjects (OECD 2015), but increasingly also on ‘soft skills’ like problem solving, team working and communication (EUI 2015). Almost 60% of employers believe there is a skills gap in Britain (YouGov 2013).

In the public debate, it is often taken for granted that the skills gap is a supply problem. The Education Secretary, Nicky Morgan, has for instance made a commitment ‘to raise the status of STEM subjects, and increase the number of students studying maths and physics at A level by 50% within 3 years.’

In this briefing Professor Thijs van Rens argues that this view is incorrect. His research shows that the choices that individuals are making regarding their field of study and occupation, are optimal given considerations of employability and remuneration. This analysis, which is based on US data, shows that the source of labour market mismatch is that market wages do not reflect the relative demand for different types of skills. Businesses complain about the lack of workers with STEM skills, but at the same time they are unwilling to raise wages for these workers (or to reduce wages for workers with skills that are in less demand).

Summary points:

  • Almost 60% of employers believe there is a skills gap. Policy is focused in particular on raising the supply of STEM skills.
  • The skills gap is hugely significant in economic and individual terms. It may account for about a third of the increase in the unemployment rate in the US in the Great Recession.
  • There are three possible reasons why the gap persists: workers do not adjust to changes in skills demand by acquiring the skills they need to find a job; firms do not adjust to changes in skills supply by creating jobs that utilise the skills that are available in the labour market; or wages do not reflect skills shortages by creating incentives for workers to acquire scarce skills or abandon occupations where wages are falling due to an abundance of skills.
  • The analysis presented in this paper – based on US data – suggests that the most important of these reasons is that wages do not reflect skills shortages. Wages fail to go up for skills that are scarce; and fail to fall for skills that are abundant.
  • The implication is that an increased emphasis on scarce skills in schools, colleges and universities will not help to reduce the skills gap. Students have a choice about what skills they acquire, and whether they use these skills on the labour market. As long as wages do not reward certain skills, they will either chose not to acquire these skills, or even if they do, they will find employment in other occupations.
  • The analysis described here has not (yet) been able to identify the underlying frictions that prevent wages from reflecting skills shortages and thus closing the skills gap. But it does suggest that the next time that an employer tells you about the skills gap, you should ask why they do not raise wages for the type of workers that are hard to find.

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