Future world of work series III. Skill shortages: how real are they and what can enterprises do to avoid them?
Executive summary Mention of skill shortages in the media is commonplace. But what does a skill shortage refer to? Does it mean there are too few people for the available jobs in other words, a labour shortage? Or does it mean that employers are being too particular wanting the right person with the right skills? Does it refer to a lack of people with specific skills in particular sectors? Skill shortages exist when jobs for specific skills or an occupation cannot be filled at normal pay rate and employment conditions, and where the location is reasonably accessible. This definition implies more than an absolute scarcity of job seekers, as it suggests that the pay and conditions may not be enough to attract the right applicants. Acknowledgement This report was prepared by Dr Richard Curtain of Curtain Consulting, Melbourne in response to a brief provided by Manpower Services (Australia) Pty Ltd. Dr Curtain is a former Associate Professor in the National Key Centre in Industrial Relations, Monash University, Melbourne. Manpower Services (Australia) Pty Ltd, Level 2, 34 Hunter Street, Sydney NSW, Australia 2000 Phone: +61 2 9246 8950 Fax: +61 2 9321 6651 Web: www.manpower.com.au August 2005, Manpower Services (Australia) Pty Ltd ISSN 1832-7044 Publications can be downloaded from our website. Enterprises, for a variety of reasons, cannot rely on governments to solve the problem of skill shortages. Governments may invest in more training places and they can increase the intake of skilled migrants, but it is only at the enterprise level that the effects of skill shortages can be tackled directly. Does looking to governments to act on skill shortages hide a deeper problem that employers are not dealing with? Have employers become complacent, expecting to find the right person with a minimum of effort? Have other options, such as the use of on-hired employees, become too easy for enterprises to take? These questions raise more fundamental concerns. Has the focus of the human resources function within some enterprises become too operational and reactive? If the attraction and retention of talent is key to an enterprise s capacity to grow, does your enterprise have a clear strategy in place? What does a strategic approach to finding and keeping talent involve? This paper considers the above issues and explores options and possible answers to the question of how to solve skill shortages. i 2005, Manpower Services (Australia) Pty Ltd ii
Introduction How governments are responding What is the evidence of skill shortages? Economy-wide evidence about present skill shortages is difficult to come by. Authorities such as the Australian Treasury and the Reserve Bank dispute whether widespread skill shortages currently exist in Australia. On the one hand, the February Bulletin of the Reserve Bank reports that it is becoming increasingly difficult to find suitably skilled labour (see Graph 1 below). Graph 1: Difficulty Finding Suitable Labour No simple or easy way to identify skill shortages Governments have a limited range of tools at their disposal to address skill shortages. Those tools that do exist can do little to address shortages in the immediate term. The most common response has been to increase the number of skilled migrants 20,000 more places will be added in 2005-2006 to reach a total of 97,500 places for the year. Skilled migration has grown enormously from 1995-96 when it was only 24,100 places. This shows its important role over the last decade in helping to overcome skill shortages. Nevertheless, considerable time lags make this a medium-term solution only for enterprises. Important role of skilled migration over the last decade % 20 0-20 -40-60 ACCI-Westpac survey* (LHS) NAB survey** (RHS) -80 0 1979 1984 1989 1994 1999 2004 * Net balance of firms finding it harder to get labour than three months ago ** Per cent of firms indicating that availability of suitable labour is a constraint on output Sources: ACCI-Westpac:NAB % 50 40 30 20 10 Increased investment in the provision of training places is another option. The federal Government s funding on education and training in 2005-06 will total $20.9 billion, an increase of $2.4 billion over the previous year. Specifically, vocational and technical education is to gain an extra $2.5 billion. This includes an additional injection of $280.6 million for new initiatives to address skill shortages, particularly in the traditional trades. However, investing in more training places takes time to have an impact and therefore enterprises cannot turn to governments to find an easy answer. They need to develop their own strategies to ensure that their growth is not restricted by a lack of skills. Why governments find it hard to anticipate skill shortages Public investment in skills training is important Inherent lags mean governments cannot solve skill shortages in the short-term Source: The Reserve Bank, 2005, Statement on Monetary Policy, Sydney, 7 February. Conversely, the Australian Treasury in the 2005 Budget Papers, claims that: there is little evidence of generalised wage pressures or skill shortages. These differing viewpoints highlight the ambiguity of the concept and the difficulties enterprises have in looking to an authoritative source for answers. Tighter labour markets likely to continue Liberal market economies, such as Australia s, tend to focus on producing standardised products and services, using general skills. Governments aim to lift threshold education levels and provide funds for the acquisition of general, transferable skills. It is left up to individuals and enterprises themselves to acquire more specialised skills. However, the broad trend for the future is clear. A three-decade record low unemployment rate means fewer active job seekers are looking for work. Fewer young people, in both relative and absolute terms, will be entering the workforce over the next 20 years and beyond. The result will be tighter labour market conditions for the foreseeable future. Publicly funded training is supply driven The focus by governments on the provision of general skills means that publicly funded training providers often have poor links with enterprises. TAFE colleges concentrate on offering courses based on general, transferable skills. This often means that short courses tailored to the needs of enterprises are not a priority. The publicly funded training system is not responsive 1 2
As well, TAFE performance is not outcome-focused. For example, we do not know how well the graduates of individual TAFE colleges do in terms of their subsequent employment and wage outcomes. Nor do we know how satisfied TAFE graduates are with the training they have received at a particular institute. The Federal Government acknowledges this lack of engagement the training system has with its end users. They are setting up an Institute for Trade Skill Excellence in 2005. The new Institute is to provide an employer perspective on the quality of training in the traditional trades, acting as a consumer voice for clients of the system. 1 Structured entry level training is delivered through inflexible arrangements Three factors have made it harder for enterprises to find and retain skilled people. First, the Internet now offers ready access to low-cost methods of widely advertising job vacancies. This means it is much easier to collect more information from a larger number of applicants. The result is a vast rise in available information about applicants, producing a more complicated selection process for employers. Second, a greater range of options exists in the type of employment arrangements available. Employers can now select arrangements that best suit particular types of work. Third, to cope with this increase in information and options, the number of specialist employment services providers has grown rapidly. However, the services these firms offer can vary greatly in terms of their quality and capacity to offer sustained support. Employers now have to deal with a much more complex labour market Other problems with the training system stem from its rigid requirements. Industrial awards still dictate a time-based approach to training for apprenticeships. This makes it impossible to vary the length of training to match the needs of employers. Government can provide only limited information about skill shortages The Federal Government is also only able to provide limited information about labour market trends. The best sources of information on skills availability resides at the local level. It is to be found among those who are dealing with the issue on a daily basis. Labour market brokers such as employment services firms can play a key role in matching people to jobs and hence improving the efficiency of the labour market. Is the Human Resources (HR) function equipped to operate in a dynamic and complex labour market? Frequent talk in the media of skill shortages may reflect a deeper set of problems facing employers their own inability to cope with a tighter labour market. Employer survey responses about increased difficulties in finding suitable people may indicate their own uncertainties about how best to find and retain talent. Industrial awards still determine length of time in training for apprentices How well are HR departments coping with the greater availability of information about prospective job candidates? How well are they coping with greater options in how jobs are packaged and the range of services offered by labour market brokers? Decision making processes can easily get overwhelmed, causing managers to return to the familiar or to turn to others for help without having a clear idea themselves of why help is needed. The impact of the Internet Employers in today s labour market can advertise their vacancies more promptly and more widely at lower cost via the Internet. Newspaper advertisements are no longer the most common means of attracting job candidates. The ANZ Bank notes that in the past as many as half of all job vacancies were advertised in newspapers, but this has reduced to no more than one in three, to one in five job vacancies. Internet job sites offer information about more job vacancies at much lower cost than newspapers. The Olivier Internet Job Index reported for March 2005 an all-time high of an average of 154,291 Australian jobs advertised, representing a 30 per cent increase compared with 12 months ago. The far greater number of job advertisements on the Internet compared with newspaper advertisements is shown in the graph below, produced by the Olivier Internet Job Index in their March 2005 Report (see Graph 2). Use of the Internet to advertise jobs means much more information is generated which then needs to be processed 1 Department of Education, Science and Training, 2005, Skilling Australia: new directions for vocational education and training in Australia. February 2005, p 18. 3 4
Graph 2: Comparison of the number of job advertisements per the ANZ Newspaper Advertisements Job Index and the Olivier Internet Job Index 180,000 160,000 Growth in employment services firms Employment services providers have grown rapidly since the late 1990s with the number of providers of employment services increasing by nearly a third. The services offered can include recruitment and selection, contracted services and the services of on-hired employment. More brokers now available to provide varying levels of assistance. Number of Advertisements 140,000 120,000 100,000 80,000 60,000 40,000 20,000 0 Dec-99 Feb-00 Apr-00 Jun-00 Aug-00 Oct-00 Dec-00 Feb-01 Apr-01 Source: The Olivier Group, 2005, Olivier Internet Job Index: The Report March 2005, Sydney, 4 April. The Internet also offers a low cost method of collecting a large amount of information on job applicants. The challenge for employers is to find efficient ways to process this additional information. One way to make sense of this greater amount of information about job seekers is to use the services of a trusted broker. This usually requires developing a business relationship over time, giving the broker a chance to gain a good appreciation of the employer s needs. However, for such a business partnership to be successful, the initiating enterprise needs a strong sense of the strategic advantages to be gained. More options re: employment arrangements Jun-01 Aug-01 Oct-01 Dec-01 Feb-02 Olivier IJI Employers also now have greater choice in how they package a job, as one size fits all no longer applies. Much greater flexibility is available in how work can be performed. This applies not only to the number of hours worked, but also to when they are worked and where they are worked. What sort of engagement contract is most suitable: a contract of service or a contract for services? When engaged as an employee, what form of employment contract is most suitable? Apr-02 Jun-02 Aug-02 Oct-02 Dec-02 Feb-03 ANZ Newspaper Apr-03 Jun-03 Aug-03 Oct-03 Dec-03 Feb-04 Apr-04 Jun-04 Aug-04 Oct-04 Dec-04 More choices in how jobs can be packaged These services can help enterprises deal with a rapidly changing labour market. Expertise in job matching using sophisticated software, for example, can make it much more cost effective for employers to work through a recruitment specialist. By using these labour market brokers, employers are able to lower the transaction costs of engaging employees. Service providers, however, also come at a transaction cost. Many business engagements are not well-focussed enough to ensure good returns are gained, whether these relate to flexibility, lower cost or standardisation of processes. In the face of tighter labour markets, how should enterprises respond? How can the delivery of the HR function be improved? Is there a need to take a more strategic HR approach? What options for enterprises? What options do managers have to find and retain the right people? One option is to stay with the status quo, relying on attitudes to recruitment shaped by the past. Or they can anticipate the greater difficulties they will be facing and devise ways to lessen the effects. One approach is to develop a strategy that looks to the long term benefits. This needs to be closely aligned to where the enterprise is heading, and have the commitment of all senior management. Roger Collins and others have highlighted how managing HR entails both an operational and a strategic focus. 2 And within each approach, the available options can be either reactive or proactive. A focus on the operational is essential but it is not enough. To minimise the chances of an enterprise experiencing skill shortages, more is required of the HR function than merely delivering a standardised service competently. 2 Collins, Roger, 2003, Clarifying our raison d etre: identifying how HR adds value, Australian HR needs to combine a forward looking strategic perspective with a focus on effective service delivery Graduate School of Management, Sydney. 5 6
How to lift the HR function to a higher plane? At least three markets are vital to organisational success the financial market, the customer/product market and the talent market. Each market deserves a distinctive strategic focus and an integrated strategic response. 3 The forces of demography and globalisation as well as the impact of labour markets, will redefine the status and importance of HR management in Australia. 4 The HR function needs to shift its focus from merely providing services to developing and supporting strategy. This strategy must be aimed at maximising the talent available to the enterprise. Proactive HR strategy Strategic HR, in its proactive form, involves identifying opportunities that create competitive advantage. This is achieved through the more effective utilisation of people s competencies, potential, commitment and capabilities. A HR strategy to address skill shortages involves anticipating and preparing for changes in regulation and workforce demographics. HR Strategy could also include segmenting the organisation s workforce according to the criticality of the functions they perform. The task then is to decide how to source the required skills through one of three means: make growing talent from within buy recruiting people with the requisite skills or rent using the services of on-hired employees from an employment services company. A HR strategy also requires working out how these segments need to be managed differently. This includes deciding what scarce resources are needed for which segments of the enterprise s workforce. Strategic HR can also involve setting up and managing a relationship with a strategic partner around a range of workforce issues. These can range from recruitment and selection to providing on-hired employees and going offshore to have work performed by skilled people in other countries. Segmenting the workforce according to critical functions Need to determine what scarce resources go to which critical segments Conclusion A skill shortage occurs when jobs requiring specific skills or occupations cannot be filled with normal pay rates and/or employment conditions, when the location is reasonably accessible. The key challenge is for an enterprise to understand where skill shortages exist, or have the potential to exist, and to implement strategies to combat them. Due to a limited ability for governments to reduce skill shortages in the shortto medium-term, skill shortages need to be addressed from within individual enterprises. Enterprises must take action to minimise such shortages by developing and implementing a specific HR strategy. Does your enterprise s HR department play more than an operational role by participating in the setting of the overall strategy for your enterprise? Does your enterprise have a strategy to address the market for talent, alongside strategies for the financial and customer/product markets? In implementing such a proactive HR strategy, there are several factors that need to be considered: the labour market is now more complex; there are a greater range of employment options; there is now a greater number of employment services providers; and there has been a high impact from the increased information generated by Internet job sites. The issue is not only about the need for HR managers to adopt more strategic ways of thinking. The challenge for senior management as a whole is to devise and commit to a talent strategy as a fundamental element of a comprehensive business strategy. A full set of references for the sources used in this paper are available from Manpower Services (Australia) on request. 3 Boudreau, J & Ramstad, P; 2002, From professional business partner to strategic talent leader : what s next for human resource management, Center for Advanced Human Resource Studies, Cornell University, Working Paper 02 10. 4 Nissen, V., Speech to the Committee for the Economic Development of Australia conference on IR Reforms and Workforce Participation, Strategies to meet the skills challenges, 15 August 2005. 7 8