What is a Skill Shortage? (a draft paper)

By Neale Towart

A shortage of skills is a source of great aggravation to firms. In a market economy, firms are accustomed to being limited by their capacity to find buyers for their products, not by their capacity to produce them.

When firms have buyers waiting, but cannot produce enough to satisfy the demand because they cannot recruit sufficient skilled workers, they interpret this a serious failure of the skills development system. The decline in the overall unemployment rate (at 5.1% in February 2005, it is the lowest for three decades), is causing increasing numbers of firms to bump up against capacity constraints caused by skills shortages. But even in times of relatively high unemployment, employers frequently cite skills shortages as one of the business difficulties that they face. What is more, they imply that there is a duty on public policy to come to their aid by somehow reducing such shortages.

The vocational education and training system has an important role to play in assisting with the smooth matching of the skills wanted by employers with the skills offered by workers. It will be helped in this task if we can give a precise meaning to the term 'shortage'; identify the circumstances under which any such shortage is likely to be naturally and efficiently resolved by market forces; and identify when direct policy intervention is called for to assist the market. VET will be a part of any public policy response. It is the purpose of this paper to set out some clear thinking on each of these issues.

National Institute of Labour Studies, Flinders University