Forecasting Skills and Labour Market Needs Statements and Comments. Introduction. 1. Why anticipating the future? NETHERLANDS

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1 Forecasting Skills and Labour Market Needs Statements and Comments Frank Cörvers Research Centre for Education and the Labour Market (ROA), Maastricht University Introduction This paper comments on both the report Education, Training and Demand for Labour in Finland by 2015 (Katajisto and Kimari 2005) published by the Finnish Board of Education, and the Finish Government paper (Saijets et al. 2006). The Finnish Government paper is more or less a summary of the report, but also provides some additional information. I will discuss the method of forecasting skills that is used in Finland, and the interpretation and use of the forecasting results by the Finnish Ministry of Education and the Finnish National Board of Eduation. My most important critical points concern the planning of intake needs by the Ministry of Education, the optimistic view on the usefulness of government intervention, and the underestimation of labour market adjustments. More specifically, I will subsequently discuss the following issues: Why anticipating the future? Manpower planning versus manpower forecasting Labour market adjustment processes Some critical points on the modelling These issues will subsequently be discussed in the next four sections. 1. Why anticipating the future? From the report by the Finnish Board of Education it can be concluded that the quantitative information on demand for new labour is used to set targets for intake needs of entrants by the education system. In the Finnish Government paper the Finnish model of anticipating skills and labour market needs is explicitly linked to the employment policy guideline nr. 20 of the European Union to improve matching of labour market needs by better anticipation of skill needs, labour market shortages and bottlenecks. This guideline is mentioned to point to the relevance of modelling and forecasting educational needs. The information on quantitative needs for upper secondary vocational education and training, polytechnic education and university education is used for planning purposes in order to reach a balanced labour market situation in Finland. Although the relevance of anticipating skills needs is underlined by the employment guidelines, one should be aware that the guidelines of the European Union do not prescribe that the information on the quantitative needs for various kinds of education has to be used for planning purposes in the way that is done in Finland. In the next section I will further discuss this point. Apart from the model for the anticipation of skill needs, the Finnish Government paper also discusses the socalled long-term labour force model (LT-model). The goal of the LT-model seems to be twofold. First, the model is suited to anticipate the ageing of the population and the restructuring of the global economy. Main challenges to the Finnish economy are the decrease of the working age population and the acceleration of the pension expenditures due to the retirement of the baby boom generation around the turn of the decade, and 8-9 June 2006 Peer Review Forecasting Skills and Labour Market Needs, Finland 1

2 the rise of the costs of health and social care provision. Second, the forecasting results of the LT-model are used as an input for the model on the anticipation of skill needs. This includes the scenarios and sensitivity calculations on alternative development paths for GDP, productivity and employment. However, the assumptions underlying the basic scenario (the most probable) and the target scenario (the most wanted) remain unclear, are not motivated, and cannot be commented on. Likewise it is not clear whether the targets are realistic and which policies are required to meet the targets. The LT-model is a macroeconomic model to asses the impact of economic growth on employment, accounting for both supply and demand factors of the economy. The supply of labour is determined by population forecasts (source: Statistics Finland) and participation rates (source: Labour Force 2025, Interim report, Finland). The participation rates depend on age, education, child-care, disability and early retirement. I will not comment on the forecasts for the demographics and participation rates, since this may be beyond the goal of this peer review, and the specification of the model equations are unknown to me. In view of the discussion in the next sections, it is interesting to note in the Finnish Government paper emphasizes that participation rates depend heavily on the demand for labour. The demand side of the LT-model uses data on production, labour productivity, hours worked and the number of employed (Sources: national account statistics and labour force survey). It is, however, not clear where the latest forecasts of economic activity come from. The assumptions made on the development of the working time per employee and the relationship between unemployment and labour force participation are not motivated. 2. Manpower planning versus manpower forecasting The Ministry of Education (2004) has published targets for intake needs of entrants in the Development Plan. These targets are set in between the current annual average of entrants and the estimated annual average intake needs between 2001 and The targets are used for the planning of the quantitative provision of education and training by educational institutes. For each of these institutes the Ministry of Education seems to limit the number of students within the different fields of education to a maximum number. Although it remains unclear to me how far-reaching the influence of the Ministry of Education exactly is in practice, I have the impression that the estimated intake needs by the Finnish Board of Education play a huge role for the educational provision. This holds in particular true when the situation in Finland is compared to that in other OECD countries (Heijke 1994; Neugart and Schömann 2002). Apart from Finland there is - as far as I know - no other country in the OECD that restricts the intake of students per educational field and institute to a maximum on the basis of manpower requirement forecasts. The manpower planning concept that is used in Finland was popular at the beginning of the sixties. 1 In those days Parnes (1962) developed a manpower planning model on the basis of the input-output structure of the economy. The planning begins with the determination of the target growth in the Gross National Product over a period of several years. From this, after a number of steps, the labour requirements in the various occupations and the educational qualifications which are required for these occupations are determined. The labour requirements are then compared with forecasts of the working population and the flow of graduates from the various types of training onto the labour market. The graduate-flow forecasts are compiled with the aid of a student-flow model that describes the flows of students within the educational system. From the differences between future labour requirements and the future working population, allowing for the expected 1 The next two subsections are taken from Cörvers, Heijke and De Grip (2002). 8-9 June 2006 Peer Review Forecasting Skills and Labour Market Needs, Finland 2

3 flows from the educational system, it is possible to extract the required information on the extra training initiatives which are needed to achieve the desired growth in the Gross National Product. Various methodological and fundamental objections have been made to the manpower requirements approach. The methodological objections focus particularly on the fixed coefficients, which are used in the forecasting models to translate economic development into changes in employment differentiated by training and occupation, and on its mechanical concept of labour market functioning, in which there is no place for the working of substitution and other adjustment processes (Blaug, 1967). The fundamental objections are that future developments are not in fact sufficiently predictable, and that an exclusive relationship between job requirements and training is assumed without adequate justification. These objections, and the lack of sufficient statistical data for the estimation of the forecasting models, led to the rejection of the planning concept. 3. Labour market adjustment processes In many contributions in the book edited by Neugart and Schömann (2002) is warned against a too optimistic view on predicting shortages and excess supply without accounting for the typical pitfalls in manpower forecasting (see e.g. the American, Canadian, British and Dutch contributions). Unfortunately the Finnish study does not make any reference to manpower forecasting studies in other countries that had to tackle similar problems. One of the main problems in manpower planning models is that these models do not take into account the numerous adjustment processes that can occur on the labour market. The models ignore price and wage responses to discrepancies on the labour market, underestimate the substitution across educational categories within many occupations (see also Cörvers and Heijke 2004), underestimate capital-skill substitution (i.e. changes in the production processes), ignore the re-entry of non-participants and immigration, etc. Adjustment processes can be costly, which may explain the general trend to broaden educational courses. Broader courses may lead to a broad range of occupations, although one has to take into account the trade-off between flexibility and productivity or lower adjustment costs (Heijke and Borghans, 1998). Discrepancies between specific job requirements and qualifications of workers can also be dealt with by means of short training courses or on-the-job-training. Given the complexity of the functioning of the labour market it is too optimistic to think that government intervention can solve all kinds of discrepancies on the labour market. In the modern view on manpower forecasting information is provided on the future labour market situation for those investing in education or recruiting on the labour market. The correspondence of the education system to the labour market is improved by providing adequate information (e.g. early warnings ) and making the labour market more transparent for individuals, educational institutes and firms. The labour market adjustment processes make it very difficult to plan the future by setting particular targets. Moreover, the longer the period of forecasting, the more important adjustment processes are. Therefore manpower requirement models in general predict larger shortages or surpluses when the forecasting period is longer. Long term labour market forecasting should be based on what if scenarios, accounting for feedback mechanisms and substitution processes on the labour market, parameters in the labour market model should be varied in accordance with a comprehensive view on the future and/or a package of policy measures, and the gaps between supply and demand should be interpreted in a careful way (see e.g. Borghans and Willems 1998; Wieling and Borghans 2001). In short, the scenarios should be scanning the future, instead of planning the future. 8-9 June 2006 Peer Review Forecasting Skills and Labour Market Needs, Finland 3

4 4. Some critical points on the modelling I would like to raise the following critical points: No reference is made to the usual demand and supply framework in manpower forecasting models. Natural wastage is not similar to replacement demand, since the mobility flows between occupational groups are not taken into account when calculating natural wastage. Contrary to the report by the Finnish National Board of Education, the Finish Government paper refers to occupational transitions as part of the model. It seems to me, however, that the occupational transitions are not included in the forecasting of the total demand for new labour and the intake needs. This is an important omission in the forecasting model. It is not clear to what extent the unemployed can be regarded as suppliers of labour who compete with the new entrants for the jobs on the labour market. In particular the unemployed may suffer from skill obsolescence. Moreover, the long-term unemployed may have certain adverse characteristics that make it difficult for them to find a job. The performance of the education system in Finland is presented by giving the target rates on completion, multiple education and labour force participation. It remains unclear to what extent these rates differ from the current rates, which policies contribute to the improvement of the rates, and to what extent these policies have a chance of success. Finally, the drop-outs from the education system may not be willing or capable to finish their studies. It is however unclear in which occupations they may find a job. 8-9 June 2006 Peer Review Forecasting Skills and Labour Market Needs, Finland 4

5 References Blaug, M. (1967), Approaches to Educational Planning, Economic Journal, Vol. 77, pp Borghans, L. and E. Willems (1998), Interpreting Gaps in Manpower Forecasting Models, Labour, Vol. 12, pp Cörvers, F., H. Heijke and A. de Grip (2002), Beyond Manpower Planning: A Labour Market Model for the Netherlands and its forecasts to 2006, in: M. Neugart and K. Schömann (2002; eds), Forecasting Labour Markets in OECD countries, Edward Elgar, Cheltenham/Northampton. Cörvers, F., and H. Heijke (2004), Forecasting the labour market by occupation and education: Some key issues, Working Paper, ROA-W-2004/4, Maastricht University. Heijke, H. (1994; ed.), Forecasting the labour market by occupation and education, Kluwer Academic Publishers, Boston/Dordrecht/London. Heijke, H. and L. Borghans (1998), Investing in education, in: H. Heijke, L. Borghans (eds), Towards a Transparent Labour Market for Educational Decisions, Ashgate, Aldershot/Brookfield (USA)/ Singapore/Sydney, pp Katajisto, J. and M. Kimari (2005), Education, Training and demand for Labour in Finland 2015, Finnish national Board of Education, Helsinki. M. Neugart and K. Schömann (2002; eds), Forecasting Labour Markets in OECD countries, Edward Elgar, Cheltenham/Northampton. Parnes, H.S. (1962), Forecasting Educational Needs for Economic and Social Development, OECD Paris. Saijets, H., P Tiainen, K. Kangaspunta, H. Mäenpää, M. Kimari, I. Hanhijoki (2006), Forecasting Skills and Labour Market Needs in Finland, Finnish Government paper prepared by the Ministry of Labour, the Ministry of Education and the Finnish National Board of Education, Wieling, M.H. and L. Borghans (2001), Discrepancies between Supply and Demand and Adjustment Processes in the Labour Market, Labour, Vol. 15, pp June 2006 Peer Review Forecasting Skills and Labour Market Needs, Finland 5