Future Labour Supply and Demand 101: A Guide to Analysing and Predicting Occupational Trends

Transcription

1 Assessing past, present and future economic and demographic change in Canada Future Labour Supply and Demand 101: A Guide to Analysing and Predicting Occupational Trends Prepared for: Forum of Labour Market Ministers Labour Market Information Working Group Prepared by: 15 Martin Street, Suite 203 Milton, ON L9T 2R1 March 27, 2008

2 A Guide to Analysing and Predicting Occupational Trends Page i Abstract The Forum of Labour Market Ministers (FLMM), Labour Market, Information Working Group (LMIWG) requires a user-friendly guide to analysing and predicting occupational trends. The guide has several sections to help stakeholders understand the rationale for and approach to developing occupational demand/supply models and forecasts. About this Report This report was prepared by, a consulting organisation created to improve the quality of spatial economic and demographic research in Canada. The report was sponsored by the Forum of Labour Market Ministers (FLMM). The authors accept all responsibility for any remaining errors or omissions. The views in this report reflect those of the authors and do not necessarily reflect those of the FLMM or its member agencies. Questions or comments about this report can be sent to: Mail and Courier Address 15 Martin Street, Suite 203 Milton, Ontario L9T 2R1 Canada Phone Numbers addresses Robert Fairholm (416) rfairholm@c4se.com Fax Number (905)

3 A Guide to Analysing and Predicting Occupational Trends Page ii Table of Contents Executive Summary... iii Introduction... 1 Labour and Skill Shortages... 2 Demand, Supply and Causes of Labour Shortages... 3 Canadian Cyclical and Structural Labour Shortages... 5 Labour Market Theories... 7 Why Forecast Labour Shortages Occupational Models Developing a Modelling System Occupation Modelling Approaches Sector Models Work Plan References Appendix I: Labour Hoarding Appendix II: Skills Transferability Matrix Appendix III: Changes to AEII Model Dynamics Appendix IV: Data Sources Appendix V: Data Quality Appendix VII: Essential Skills Profiles Appendix VIII: American Occupational Information Network Appendix IX: Stock-Flow Labour Supply Model Appendix X: Extrapolative Trends... 97

4 A Guide to Analysing and Predicting Occupational Trends Page iii Executive Summary Employers, education and training providers, individual students and workers themselves, all have an interest in trying to peer into the future in order to try to anticipate what may occur and to ensure that their own decisions result in the best possible outcomes however these might be defined. The fact that considerable efforts to conduct such forecast are going on all over the world suggests that, on balance, such activities are regarded as very useful and worth substantial investment by the public sector. Therefore it can be concluded that forecasting of the labour market is inevitable. The only real question, is how this should be done. 1 Hopkins (2002) indicates that manpower planning has, at its core, the problem of mismatch between labour supply and demand. To understand the focus on workforce shortages and skill gaps, it is helpful to define what these terms mean. A variety of definitions have been suggested. Roy, Henson and Lavoie (1996) define a skill shortage or gap as the divergence between the quantity of a given skill supplied by the workforce and the quantity demanded by employers at existing market conditions. Shah and Burke (2003b) suggest that a distinction needs to be made between the concepts of skills shortage and gap. They define shortage in a manner similar to Roy, et al. but suggest that skills gap refer to situations where employers are hiring workers whom they consider under-skilled or that their existing workforce is under-skilled relative to some desired level. Other researchers expand on the concept of shortage by differentiating between types of shortage, such as between an aggregate labour shortage and shortages due to a mismatch on the labour market. And Richardson (2007) distinguishes between shortages according to the ease by which they can be alleviated, based partly by the length of the training process. Cyclical and structural factors influence labour demand, supply and workforce shortages. Cyclical factors reflect short-term fluctuations in aggregate demand and its influence on the demand for and supply of labour. The business cycle tends to last in the neighbourhood of fiveto-seven years. In contrast to the relatively short-term influence that the business cycle has on the labour market, structural changes can last for decades. They reflect long-term developments that are occurring in the economy or society independent of short-term fluctuations in aggregate demand. Saunders and Maxwell (2003) indicate that labour markets in Canada will continue to be affected by three structural forces of change: technological advances, globalisation of competition and changes in the demographic structure of the workforce. Cyclical and structural forces are contributing to aggregate workforce shortages in the economy currently. Canada s unemployment rate is at 33 year lows, and the unemployment rate in many provinces is at multi-decade lows despite the aggregate participation rate being at record highs. Given the expected continuation of these structural forces, there is the prospect of worsening aggregate and specific labour shortages and skills gaps in the years ahead. Unemployment and labour shortages are two sides of the same coin. In the first instance, there is excess supply of labour, in the second instance there is excess demand for labour. There are many economic theories that examine the workings of the labour market. The neoclassical view suggests the labour market should reach equilibrium relatively quickly and that there should be no unemployment and/or labour shortage. If these conditions persist, there must be institutional factors that are inhibiting the workings of the market. Other theories explore why the there should be unemployment and/or labour shortages. McMullin, Cooke and Downie (2004) indicate that when confronted with a labour shortage, adjustments by firms include wage level adjustments, and attempts to move production or to attract workers from other locations, as well as providing training to the existing workforce. 1 Wilson (2001) p 564.

5 A Guide to Analysing and Predicting Occupational Trends Page iv Firms can also try to substitute away from the scarce labour towards other factors of production, such as capital and/or other types of labour. Adjustments on the part of workers generally include movement into areas of shortage, both geographically and in the sense of retraining to gain scarce skills. These adjustments to the labour market cannot take place instantaneously, however. A lack of information, the time required for training, and various institutional barriers to labour market adjustment mean that in a given place at a given time there will be gaps between the quantities supplied and demanded for particular skills. Problematic skill shortages are those which become protracted as a result of these institutional barriers to adjustment, resulting in inefficiencies. Some of the basic dynamics indicated above have been questioned. Neugart and Schömann (2002a) review the literature on whether the labour market clears. They indicate that it is widely recognised among labour economists that market mechanisms can contribute to imbalances. From the perspective of the firm it may be optimal to pay a wage that is higher than the market clearing wage, if it provides the optimal mix of wage costs and induced effort to arrive at higher productivity or reduce turnover and therefore other costs. Regardless, higher wages create unemployment. There are people around who are willing to work under the prevailing conditions but who are not offered a job, because it simply is not to the advantage of the firms. Neugart and Schömann (2002a) also indicate that although many would consider labour market imbalances temporary, the literature on multiple equilibria emphasises that economies may get stuck at various states depending on their histories. Some of these perhaps rather stable equilibria can be more desirable for a society than others. Finegold and Soskice (1988) described a mechanism that may lead to a low skill low wage equilibrium. There are other, more advantageous equilibria. But for the individual there is no incentive to invest in education, as the payoffs will not materialise. Considerable efforts are required, efforts that only a powerful actor in the market can accomplish. That is where the government could come into play, perhaps by subsidising education or by avoiding labour supply shortages right from the beginning through forecasts and appropriate policies tackling upcoming skill shortages. Neugart and Schömann (2002a) also indicate that if there are skill shortages and firms switch to filling high-skill vacancies with low-skill workers, productivity will be lowered. It may also happen that a shift in the bargaining strength towards workers leads to employment conditions that are less efficient for firms and that lower the productivity of the incumbent workforce. The former argument addresses productivity levels, but productivity growth also may suffer from skill shortages if firms reduce investments in research and development. The findings by Haskel and Martin (1996) suggest that skill shortages reduced productivity growth by 0.4 per cent per year in the United Kingdom between 1983 and As indicated by the Canadian Council on Learning (2007) the labour market reaction to shortages can lead to what Heijke (1996) terms the cobweb cycle, where students base their educational decisions on the market at the time they enter a course, rather than the market anticipated at their time of graduation. For example, if wages are high in a certain field due to a shortage of employees, many students may respond by taking the courses necessary to enter that field. After a number of cohorts have done this, there is a surplus of employees and wages go down, causing new students to stop entering that field. At the end of the cycle, a new shortage in labour occurs, and wages again go up to attract more students. Accurate information about the labour market that is frequently updated and widely disseminated can help to avoid the pitfalls of this cycle. Together the above strands of labour market research provide a rationale for occupational forecasting. The purpose of occupational forecasting is now widely perceived as providing a source of information for employers and potential employees regarding future labour market conditions by occupation and in relation to education. In particular, information should be directed towards identifying likely future imbalances between demand and supply across

6 A Guide to Analysing and Predicting Occupational Trends Page v occupations in order to improve the investment decisions of employers and employees. Where occupational forecasts have been prepared for and used on this basis, there is evidence that this information has reduced the costs likely to have arisen from uninformed labour market decisions. 2 This information is especially important when there are long lead times, such as those for training in specialised and necessary skill areas such as medicine, technology or teaching. Shortages in skilled labour in these areas could conceivably contribute to longer-term social and economic problems, and forecasting helps reduce this risk (Neugart and Schömann (2002a)). Understanding how the labour market should be directed in order to meet social and economic objectives helps governments monitor and influence both the labour and education markets in a manner consistent with these objectives (Borghans and Willems, 1998). Such foresight improves the efficiency and cost-effectiveness of the labour and education markets. 3 Occupational modelling and forecasting has a long history. The dominant approach is what is known as the manpower requirements approach (MRA). A review of current occupational modelling and forecasting practices around the world show that all groups that are engaged in detailed employment forecasting utilise, at least partially the MRA. According to Hopkins (2002), the three major steps in the MRA are: (a) projecting the demand for educated manpower; (b) projecting the supply of educated manpower; and (c) balancing supply and demand. The early attempts to use occupational forecasting and integrate the results into educational planning used fixed-coefficient models that did not reflect structural changes in the labour market. This approach led to inaccurate forecasts and considerable criticism of the MRA. The providers of occupational demand and supply models responded to their critics by trying to incorporate structural changes that influence the labour market. In order to improve accuracy, there has been a general reduction of the forecasting period from the very long term of 10 to 20 years to five to ten year forecasts. The time period, however, is long enough so that labour market participants can make decisions regarding education and training to benefit from the expected future labour market conditions. There has also been a change in how the forecasts are used. Forecasts are typically restricted to large classes of occupational groups that have large overlaps in required skills and that may reasonably be employed for broad policy-guiding purposes. 4 Most groups now provide qualitative assessments of future labour market conditions, such as poor, fair and good, as opposed to precise point estimates. Partly due to the severe criticism of the initial approach, the detailed education planning function has all but disappeared. Van Eijs (1994) argues that today manpower forecasting is considered to have two functions: a 'policy function' and an information function'. The policy function refers to the use of manpower forecasts as 'a point of reference' for policy recommendations for policymakers who have to take decisions on educational investments or other educational or labour market policies (Wilson, 1993). The information function is primarily intended to assist in occupational or educational guidance (Dekker et al., 1993), although it could also inform firms about possible future recruitment problems of workers with a particular education. 5 Today occupational models and forecasts are used in countries throughout the industrialised world. Most of these modelling systems are national in scope. Sub-national components of these modelling systems are also available. There are many differences in how the MRA is currently implemented in practice. Not all groups execute all the steps outlined above, and several groups 2 Burns and Shanahan (2000). 3 Canada Council on Learning (2007) p 7. 4 Neugart and Schömann (2002b) p 2. 5 de Grip and Heijke (1998) p 1.

7 A Guide to Analysing and Predicting Occupational Trends Page vi have extended the steps to explicitly take into consideration separations, replacement demand, labour market indicators (LMI) and skills. Differences between approaches relate to data availability and quality, as well as the amount of resources committed to the task, and the ultimate need that the model or forecast fulfills. Many forecasting groups focus on occupations as opposed to education or skills, for example. To understand current practices thoroughly, please refer to Fairholm and Somerville (2005) for a discussion of international approaches and Fairholm (2006) for a discussion of practices throughout Canada. Other recent reviews of occupational models and forecasts includes: Strietska-Ilina (1999), Papps (2001), Wilson (2001), Hopkins (2002), Neugart and Schömann (2002b), and Boswell, Stiller and Straubhaar (2004). Since these reviews were conducted there have been very few new developments in the field of occupational demand/supply models internationally, although now the use of occupational models has spread into eastern Europe, with forecasts being done in the Czech Republic, Estonia, Poland, and Romania. There is also an initiative to develop a pan-european occupational model and forecast. In Australia, there are reports that the Centre of Policy Studies has been working on supplementing the labour supply side of the model, but the details are not available currently. In Canada, most groups report no change. Emploi-Quebec has supplemented their detailed 5-year forecasts with a less detailed 10-year forecast. The 10-year forecast has less industrial, regional and occupational detail. And work is underway in British Columbia and Saskatchewan to develop education models. The BC model is particularly ambitious project to model the education system at a very detailed level. These models, however, are currently being constructed. The Alberta model, however, has evolved in a number of areas. In 2006, labour market indicators were included in the Alberta model. In 2007, changes to dynamic structure of the model were incorporated by having occupational or career choice reflect changes in relative demand. And Alberta Employment, Immigration and Industry (AEII) is planning further enhancements. In developing and using a modelling system a number of factors must be taken into account. These factors include the nature of the modelling system, expected accuracy, consistency, transparency, availability of resources and the nature of the data available to develop and use the methodology. When considering an occupational modelling system, it is also important to recognize that no one approach is ideal for all modellers. Practioners are confronted with many inherent tradeoffs between data sources, modelling and forecasting approaches. Some choices are better for some groups than others depending on their needs. Furthermore, organisations have different resources that they can devote to occupational modelling and forecasting. Generally larger and more sophisticated modelling systems require more resources to develop, maintain and utilise than smaller, simpler occupational modelling systems. A larger or more sophisticated approach is not necessarily the best approach for an individual practitioner. Often it is time and cost effective to start with a simple model that will produce useful information near the start of the process and then augment the model over time as resources permit. Many of the steps of the MRA can provide useful information to policymakers and labour market participants and so the system can be developed in a stepwise manner. For example, the development of an expansion demand forecast will provide information as to where total job growth and decline will be most pronounced. The development of a replacement demand model will provide further information as to what occupations will have job openings in the future. And an extension of the model to illustrate the educational requirements of occupations will provide information as to what types of education will likely be needed in these jobs in the future. The development of the supply side of the model will help to identify where there will likely be gaps between demand and supply in the future. This step will illustrate what type of conditions labour market participants and/or new entrants will experience in the future. The development of labour market indictors translates the demand/supply information into easy to understand

8 A Guide to Analysing and Predicting Occupational Trends Page vii summary measure(s) that can be used by workers, new entrants and firms. Indicators can also provide information about the likelihood of the forecast coming true. Occupational modellers have to consider the data as well as the modelling approach that will be used. In terms of data, three aspects must be considered: 1) data availability, 2) data coverage, 3) data quality. Not all of the concepts that are discussed in the occupational modelling literature are necessarily available from Canadian data sources. Some data are available from the census once every five years, while other data have experienced changes in classification and are available for brief historical periods. For data concepts that are available, not all data are available at the level of detailed that is required by the occupational modeller. Third, there is the issue of data quality. Not all data sources provide same degree of accuracy. From the perspective of Canadian data sources, the core national, provincial and territorial data for these models are from the System of National Accounts (SNA). In addition to the expenditure, income and production accounts, the translation of final demand categories to industry output often rely on input-output accounts that are also developed as part of the SNA. For employment and labour force concepts most occupational models and forecasts use census and/or labour force survey (LFS) type data sources. The Canadian census and labour force survey each have employment and labour force data. Educational qualifications in terms of level of schooling by labour force and employment are available from the LFS and the census. The census data also has information by field of study for employment, labour force and population. Educational qualifications by occupation data are available from the census. The National Graduates Survey (NGS) has data by educational qualifications and occupation for postsecondary school graduates. Some provinces have their own student outcomes surveys. A possible extension to an occupational model would be to determine the skills and knowledge required for various occupations. This step is undertaken in a number countries including: the US, the UK and Australia. Since the Canadian HRSD NOC classification is structured by skill and education level, forecasts by NOC categories implicitly includes an aspect of skill forecasting. In most cases, the historical population estimates that are typically used for occupational demand/supply modelling systems are from annual demographic data. In some cases, the population data come from that country s census as opposed to the postcensal estimates that are available in Canada. If the objective is to provide the most accurate estimate of population by age/sex cohort, then there are no data sources that would be more accurate or timely than the Canadian annual demographic statistics or equivalent data from a provincial statistical agency. Most models produce an aggregate trend or potential labour force estimate. Often this step is accomplished by estimating trend participation rates by age/sex cohorts and applying them to the demographic projection. The estimation of trend participation rates is usually done using LFS data, since detailed age/sex specific labour force and population data are available. Alternatively, census data could be used. Demographic projections are either done in-house using the most recent demographic data or by using externally produced demographic projections. There are three types of new entrants that Canadian provincial occupational modelling groups should take into consideration: school leavers, inter-provincial migrants and international immigrants. The development of a school leavers model requires the construction or utilization of an education model. There are two basic sources of education data that can be used to develop an education model. Provincial groups can either use the data that are available from Statistics Canada or can use provincial sourced data to construct their education models.

9 A Guide to Analysing and Predicting Occupational Trends Page viii When selecting the levels of schooling and fields of study, the modeller must take data availability and occupational outcomes into consideration. It is not possible to determine the precise number of categories that will be feasible to model prior to an examination of the data. Most models use only demographic data to determine migration flows. This approach implicitly assumes that the occupational outcome for migrants is the same as for other members of society. While this may be appropriate for interprovincial migration, the research on international immigrants clearly shows that the occupational outcomes are significantly different for these groups than for the resident population. The Canadian Occupational Projection (COPS) uses a distinct immigrants sub-model. The occupational outcomes data for non-student immigrants over the previous five years comes from a special census table. It may be possible to supplement the census information with data from the immigrant databank or the linked data from the immigrant databank and the LAD. There are also data from the census for interprovincial migrants. Net labour market re-entrants are implicitly included in many occupational models via the participation rate forecast. This step is typically not performed explicitly because of a lack of data. The ROA model uses calculations of net re-entrants by using the cohort component method to determine net labour market flows. There is a lack of data on detailed labour flows. The census and LFS record levels, but not flows between labour force states for between occupations within the labour market. This step would require a survey similar to the Survey of Labour Income Dynamics (SLID) that follows people over an extended period of time. SLID, however, does not have a large enough sample size to determine flows for detailed occupational groups. The preferred course of action depends on how the data are going to be utilised. If the objective is to determine gross out-flows, then the best course of action is to examine gross outflow data from other surveys, such as the SLID, and apply them to all the associated sub-groups. If net out-flows are a sufficient concept, then single year participation rate data from the LFS can be used to estimate net outflows using the approach suggested by Boothby (1995b). Deaths by occupation are commonly estimated by applying aggregate death rates by age/sex groups to occupational employment. This approach will obviously understate separations caused by deaths for those occupations that are riskier than average, such as firefighter, while overstate separations caused by deaths for occupations that are less risky than average, such as economist. One way to improve these estimates would be to obtain data on mortality by occupation. There may be data available from Workmen s Compensation, for example. Typically no data are used to estimate out-migration beyond the demographic statistics. It would be possible to estimate the occupations and/or the educational attainment levels of interprovincial out-migrants from the census data. International emigration, however, is more difficult, since there are no exit surveys. There are data collected on immigrants to the US from Canada, but these data may misrepresent the situation. So there is no ideal solution for this problem. Throughout the world, a large variety of data are used to construct labour market indicators (LMI). These indicators can be divided into three groups: indicators that use historical data only, indicators that use forecast data only, and indicators that use a combination of history and forecast data. Several groups construct a number of different indicators to illustrate different aspects of labour market conditions. Given the difficulties in determining whether an occupation is currently in excess demand or supply and the magnitude of the imbalance, it would be prudent to include a variety of historical data in the estimate of current labour market conditions. Many different methods are used to provide an industrial employment outlook. In many instances, a macro-econometric model is utilised, which provides industrial employment as part of an internally consistent macroeconomic forecast. This process typically has several steps. First,

10 A Guide to Analysing and Predicting Occupational Trends Page ix a view of overall economic growth is formed, often based on a survey of forecasters. Second, a macro model is used to provide a detailed set of final demand categories. Third, an input/output matrix is used to translate the final demand categories into industrial output. Fourth, employment by industry is calculated through the use of estimated employment equations. In many cases average hours are also calculated to translate person hours worked into the number employed. Occupational employment is influenced by two factors: employment changes between industries and occupational employment changes within industries. The first of these two factors affects the overall occupational employment levels if employment shifts among industries that have different occupation patterns. The second factor will directly affect occupational employment and, therefore, the overall occupational composition of employment. A considerable number of techniques are used to forecast the changing composition of occupations within industries. These range from simple extrapolation to more sophisticated regression techniques. The choice of technique depends on data availability and resources committed to the exercise. At this point in time most models do not explicitly forecast skills. Although a number of models forecast employment by educational qualifications to some level of detail. One approach combines qualitative and quantitative methods. A qualitative analysis is then undertaken for each profession and quantitative forecasts are made of future qualification requirements. The quantitative scenarios are adjusted to reflect the qualitative assessments. Most models produce an aggregate trend or potential labour force estimate. This outlook typically is comprised of two distinct components: the demographic and the labour force participation rate projections, which means that there is no interaction between the economic, demographic and participation rate scenarios. These projections are combined to determine total trend or potential labour force in order to determine the upper limit to total labour supply. Some groups use stock flow models to track inflows and outflows from the labour force. Education models are often developed outside the occupational modelling systems. Occupational modelling groups typically obtain forecasts from education ministries in their country or use models that are maintained by third parties. The transition from school to work often uses a transition matrix. Very few models explicitly include the occupational outcomes for migrants. Replacement demand is calculated in a number of different international models. While there are many similarities among the models, there are also many differences. In some instances, replacement demand is calculated outside the model. There are two basic approaches that can be used to modelling separations. Either total or net separations can be estimated. The choice between these two approaches will depend on the available data, the required level of detail and how the information will be used. Total separations will illustrate the number of jobs that are available, while net separations illustrate the number of jobs available for newcomers. For both calculations there is the need for the age distribution of employment because separation rates vary across age cohorts. Ideally the data should be differentiated by age/sex cohorts, since there are also significant differences between genders. Given the sheer size of a detailed occupational demand/supply model, most occupational modelling systems use distinct occupational demand and supply models, and there is no interaction between the two. No model determines detailed occupational demand and supply in a simultaneous manner. The Dutch model, however, uses an iterative modelling approach that includes passive and active substitution effects. There are a large number of current and future labour market indicators (LMI) that are used throughout the world. Some of these LMI rely on historical information, others utilise forecasted data, and a third type combine historical and forecast data. For the international models, COPS,

11 A Guide to Analysing and Predicting Occupational Trends Page x BLS and the ROA have very specific methods to develop indictors of labour market imbalances. In Canada, innovative approaches are used to construct LMI at the provincial level. In most cases numerical indicators are translated into qualitative assessments of future conditions to make it easier for users to understand the results and to avoid giving false sense of precision. The work plan for the development and implementation of the modelling system involves a number of steps. The development of the expansion demand, replacement demand and supply components can be carried out separately or at the same time if sufficient resources are available. It is recommended that resources be devoted to the development of the demand components first. This component is relatively easy to develop and requires much less development time than is the case for the supply component. With it developed, an occupation demand projection can be produced that would provide useful information to policymakers. This information would show the value of undertaking the development of the system and provide support for the completion of the replacement demand and supply components. The suggested steps for the system are separated into occupational demand, replacement demand and supply components. Nevertheless, the first step is the choice of the occupations to be included in the system. Without this choice neither component can be developed. Demand Model 1. Choose the industry detail for the employment model; 2. Set up the industrial employment forecast method; 3. Set up the occupational by industrial forecast approach; 4. Test the method by producing a projection; 5. Make modifications where necessary; and 6. Prepare an occupation demand projection. Replacement Demand and Supply Model 1. Decide on calculation of total replacement or net replacement demand; 2. Calculate flow coefficients from historical data for replacement demand; 3. Set up the stock flow model for labour supply; 4. Develop education sub-model; 5. Calculate remaining flow coefficient for labour inflows; 6. Construct Labour Market Indicators; 7. Test the method by producing a projection; 8. Make modifications where necessary; 9. Prepare an occupation supply and replacement demand projection; and Calculate Labour Market Indicators of future labour market prospects.

12 A Guide to Analysing and Predicting Occupational Trends Page 1 Introduction The Forum of Labour Market Ministers (FLMM), Labour Market, Information Working Group (LMIWG) requires a user-friendly guide to analysing and predicting occupational trends. The guide has several sections to help stakeholders understand the rationale for and approach to developing occupational demand/supply models and forecasts. The first section explains that manpower planning has, at its core, the problem of mismatch between labour supply and demand. The section goes on to define what is meant by workforce shortages and skill gaps. Second section discusses some of the causes of workforce shortages. The third section examines the labour market situation for Canada from a cyclical and structural perspective. In the fourth section, the report includes a framework for understand labour supply and demand dynamics from the perspective of labour market theory. The fifth section of the report explores the rationale for manpower planning. The sixth section of the document describes the dominant occupational modelling approach and recent developments in the implementation of this approach. The seventh section examines some issues in the development of an occupational modelling system including a discussion of data limitations, resources, complexity and time commitment, benefits of simple and stepwise approaches. This section also includes a detailed examination of Canadian data sources. The eighth section of the document provides a set of recommended approaches to develop a modelling system to analyse future occupational supply and demand trends and workforce gaps. Finally, a work plan is included that could be used to build and implement an occupational modelling system.

13 A Guide to Analysing and Predicting Occupational Trends Page 2 Labour and Skill Shortages Hopkins (2002) indicates that manpower planning has, at its core, the problem of mismatch between labour supply and demand. To understand the focus on workforce shortages and skill gaps, it is helpful to define what these terms mean. A variety of definitions have been suggested in the literature. The following will discuss the definitions proposed by Roy, Henson, and Lavoie (1996), Shah and Burke (2003b), Boswell, Stiller and Straubhaar (2004), and Richardson (2007). Roy, Henson and Lavoie (1996) define a skill shortage or gap as a divergence between the quantity of a given skill supplied by the workforce and the quantity demanded by employers at the existing market conditions. In order to get more precise and empirically relevant definitions, they make explicit the meaning of terms skill, existing market conditions and requirements. In their view, requirements relate to the skills employers normally utilise whereas the existing level of compensation and the structure of wages to be paid to suppliers of these skills correspond to the existing market conditions. Shah and Burke (2003b) suggest that a distinction needs to be made between the concepts of skill shortages and skills gap and recruitment difficulties. In their view, a shortage occurs when the demand for workers for a particular occupation is greater than the supply of workers who are qualified, available and willing to work under existing market conditions, and if the supply is greater than demand then there is a surplus. In comparison, a skills gap refers to a situation where employers are hiring workers whom they consider under-skilled or that their existing workforce is under-skilled relative to some desired level. Recruitment difficulties refer to the situation when employers cannot fill vacancies in spite of an adequate supply of workers. The reasons for this may be varied, and could include: relatively low remuneration being offered, poor working conditions or image of the industry, unsatisfactory working hours, commuting difficulties, ineffective recruitment effort by the firm or skills needs that are very specific to the firm. Boswell, Stiller and Straubhaar (2004) distinguish between two types of shortage aggregate labour shortage and shortages due to mismatch on the labour market. 1. Aggregate labour shortage. This occurs where there is (near) full employment, and a general difficulty in finding workers to fill vacancies. 2. Mismatch on the labour market has four basic sub-types. Qualitative mismatch. The qualifications of workers and the qualification needed to fill available vacancies are not matched. Qualitative mismatch may also be referred to as skills shortage, describing a labour market situation in which there is a lack of people with the qualifications, skills or experience necessary to carry out the jobs in question. Regional mismatch. The unemployed persons seeking work and firms offering suitable jobs are located in different regions, and the jobs and/or workers are immobile. Preference mismatch. This refers to a mismatch between the types of jobs that unemployed people are willing to take on, and existing vacancies in the relevant region. Those out of work are unwilling to take certain types of work because of inadequate remuneration or working conditions or status, despite the fact that such jobs match their qualifications and skills profile, or are located in the relevant geographical region. Information mismatch. Unemployed workers do not acquire information on relevant existing vacancies, and firms do not have the information necessary for finding persons with adequate qualifications. Supply does not meet demand because of the lack of information. According to Richardson (2007), the idea of a shortage is a slippery concept because the supply of workers with a particular skill is difficult to measure for several reasons, including:

14 A Guide to Analysing and Predicting Occupational Trends Page 3 It is not just the number of people, but also the number of hours they are willing to work; Within an occupation, there may be specialised sub-sets of skills or locations that are having difficulty recruiting while other areas are not; Vacancies may go unfilled, not because no-one is available who can do the job, but because the wages and conditions on offer are unattractive; Within every skill group, there is a range of ability, from exceptional to ordinary. This variation in quality is important to employers, but not observable in measures of labour supply; Many people work in jobs that do not directly use their formal qualifications, or are of working age but not seeking employment. In order to highlight the severity of the shortage, she suggests that training must also be taken into account and suggests the following scheme for classifying skills shortages: Level 1 Shortage There are few people who have the essential technical skills who are not already using them AND there is a long training time to develop the skills; Level 2 Shortage There are few people who have the essential technical skills who are not already using them BUT there is a short training time to develop the skills; Skills Mismatch There are sufficient people who have the essential technical skills who are not already using them, but they are not willing to apply for the vacancies under current conditions. Quality Gap There are sufficient people with the essential technical skills, not already using them, who are willing to apply for the vacancies, but who lack other some qualities that employers think are important. Richardson (2007) makes an additional distinction. This is between workers who do not have the essential technical skill and workers who are judged not to have the degree of motivation and other personal characteristics that the employers desire. She also points out that a Level 1 Shortage is more serious for firms to overcome and requires planning within the training system. Demand, Supply and Causes of Labour Shortages Cyclical and structural factors influence labour demand, supply and workforce shortages. Cyclical factors reflect short-term fluctuations in aggregate demand and its influence on the demand for and supply of labour. The business cycle tends to last in the neighbourhood of fiveto-seven years. The next section of the report will examine the cyclical situation of the labour market. In contrast to the relatively short-term influence that the business cycle has on the labour market, structural changes can last for decades. They reflect long-term developments that are occurring in the economy or society independent of short-term fluctuations in aggregate demand. Saunders and Maxwell (2003) indicate that labour markets in Canada will continue to be affected by three principal forces (or structural factors) of change: technological advances, globalisation of competition and changes in the demographic structure of the workforce. Technological change impacts the labour market in a number of ways according to Saunders and Maxwell (2003). They contributed to a shift in Canada s industrial structure away from primary

15 A Guide to Analysing and Predicting Occupational Trends Page 4 and manufacturing industries towards services. Technological change also increases the demand for highly skilled work relative to that for less skilled work, a phenomenon referred to as skillbiased technological change. The importance of technological change has been mentioned by various other researchers, see Krugman (1994) and OECD (1994) jobs report. Briscoe and Wilson (2001) found that there was strong evidence that technological change was having a very significant impact on the occupational structure in the UK. Another major structural force at work in the economy is globalisation. According to the Heckscher-Ohlin model, countries that have a relative abundance of a particular factor of production should export products than use that factor relatively intensively. For example, a capital-abundant country will export capital-intensive goods, while a labour-abundant country will export the labour-intensive goods. Land (including natural resources), labour and capital are the factors of production. High and low-skilled labour can also be differentiated. Accordingly, a number of researchers have suggested that globalisation will cause a change the mix of skills needed in advanced economies, with an increase in the need for high-skilled labour and a reduction the demand for low-wage occupations. Borjas and Ramsey (1994a, 1994b, 1995) and Borjas, Freeman and Katz (1997) found that globalisation had a significant negative effect on low-wage workers in the US. There is also evidence that globalisation has contributed to a reduction in wage differentials across countries for labour of similar skill, but has (along with technological change) led to an increase in wage inequality between lower and higher skill levels within high-wage countries. (Chaykowski and Gunderson, 2001, pp ) 6 Demographic developments will also impact workforce shortages. As indicated by OECD (2003), throughout the industrialised world, demographic developments imply an ageing workforce and ultimately a declining population of working age. There is the possibility that these developments will result in labour shortages at the macro-level. In the medium term, as early as 2015 for some countries, the increasing number of retiring baby-boomers will in some occupations lead to a replacement labour demand that may be hard to fill from domestic labour supplies. Wilson et al. (2006) indicate that key drivers of changing skill requirements include: Technological change - especially information and communications technology (ICT), which is resulting in increased demands for IT skills across a range of sectors and occupations; Competition and changing patterns of consumer demand - which have increased the emphasis on customer handling skills; Structural changes - including globalisation, sub-contracting and extension of supply chains, emphasising the need for high quality managerial skills (across a greater range than previously and at a greater depth) at various levels; Working practices - such as the introduction of team- or cell-based production in engineering, and call centres in financial services, resulting in increased demand for communication and team working skills; while more generally there has been an increase in labour market flexibility; and Regulatory changes - as well as increased concern about environmental issues, which have made important skill demands upon staff for some key sectors, including construction and finance; (survey evidence suggests that regulatory/legislative change is a particularly important driver of skills change in the public sector). 6 Saunders and Maxwell (2003).

16 A Guide to Analysing and Predicting Occupational Trends Page 5 The economic literature on labour or skill shortages suggests a number of causes. 7 According to the OECD (2003), the different causes of labour shortages can be summarised as follows: Technological change may lead to a structural shortage of workers in possession of the needed skills: workers neither had the time nor the opportunity to invest in these skills. Slow adjustments in the labour market may cause shortages. It takes time for employers to recognise labour shortages and to react to them, for example by offering higher wages. It also takes time for workers to recognise better opportunities elsewhere and to react to them. Employers may be reluctant to raise wages or are tied to collective agreements or inflexible remuneration structures. Mismatch: wrong education investment decisions resulting in too few engineers, scientists and doctors, for example. Insufficient regional labour mobility. Institutional or demographic causes: a high number of people in retirement or invalidity pensions, low female participation rates. Canadian Cyclical and Structural Labour Shortages Current workforce shortages are acute throughout Canada. According to the Conference Board s annual Compensation Planning Outlook survey, in 2007 Canadian organisations felt the most intense recruitment and retention pressure on their workforce since Almost three-quarters of organisations surveyed are experiencing difficulty recruiting or retaining employees with particular skills, a sharp increase in the past two years. 8 From a cyclical perspective, Canadian employment experienced moderately strong growth of 2.0% on average from 2002 to 2007 compared with a 25 year average of 1.7%. The recent pace of employment growth exceeded the rate of increase in the source population for the labour force, which means the employment-to-population ratio (also known as the employment rate) has been rising. The national employment rate reached a historic high of 61.7% in 2007, compared with the 25 year average of 58.5%. Despite a rise in the national participation rate to a historic high of 67.6% in 2007, the national unemployment rate reached a 33 year low of 6.0%. Many provinces experienced employment rates at historic highs in 2007, with the noticeable exception of Ontario. High employment rates have encouraged more people to look for work. Many provinces experienced a high participation rate in 2007, with most provinces having participation rates at or near the highest ever recorded. Despite high participation rates, the total unemployment rate in most provinces is at multi-decade lows. One consequence of such low unemployment rates combined with high participation rates is that employers in many regions and sectors are experiencing difficulties finding workers with the skills they need. These cyclical shortages are being made worse structural factors that are directly contributing to labour shortages. This combination of cyclical and structural factors has resulted in an atypical dynamic in the labour market during the current business cycle. As is discussed in Appendix I, there is evidence that firms are hoarding labour given the prospect of worse labour force shortages in the future. For firms this implicit bargain to boost headcounts and reduce labour utilisation is rational if fixed labour costs are high or rising compared to variable labour costs. For employees this is a rational choice if there has been a change in work/life balance preferences. 7 See Roy, Henson and Lavoie (1996) p 12. McMullin, Cooke and Downie (2004) p ii. Saunders and Maxwell (2003). And OECD (2003). 8 Go2 website. Labour shortages up the ante on recruitment and retention.