Australian Business Economists Speech by the National Skills Commissioner

Australian Business Economists Speech by the National Skills Commissioner

Introduction

I wish to acknowledge the traditional custodians of the various lands we are meeting on, and pay my respects to elders, past, present and emerging.

I intend to speak about labour and skills shortages, and offer some perspectives on both – in many cases based off data the National Skills Commission (NSC) either collects or creates.

Current State of the Labour Market

I’ll start, however, with some observations on the state of the labour market.

It is fair to say that the Australian labour market has weathered the impact of the global pandemic well.

While the outbreak of the Delta variant and associated lockdowns had a significant, negative impact on the labour market for much of the second half of 2021, activity has rebounded strongly.

Consequently:

  • total employment, total hours worked, and the employment-to-population ratio are all at record highs;
  • the participation rate is close to its record high achieved earlier in 2021;
  • the unemployment rate has reached its lowest rate since August 2008; and
  • the underemployment rate is now at its lowest rate since November 2008.

Of course, Omicron poses some uncertainty for the labour market in the short-term. That said, and as the RBA’s most recent set of forecasts show, the labour market is likely to tighten further over the course of this year.

The strength in the Australian labour market is not seen in other economies though. Indeed, the level of employment in the US and the UK is, for example, lower today than prior to the onset of the pandemic.1

Vacancies

That said some of the Australian labour market’s characteristics can nonetheless be seen overseas.

One example is the very high level of job vacancies.

Job advertisements, captured in the NSC’s Internet Vacancy Index (IVI) reached their highest levels since 2008 in October and November 2021, before declining marginally by 2.5% (or 6,200) in December, to stand at 245,600. The level of recruitment activity remains significantly elevated compared to pre-COVID levels, with job advertisements up by 46.0%.

The most recent ABS data recorded 396,100 job vacancies in the November 2021 quarter – also well above pre‑COVID levels.

In the US and the UK, even though employment is below pre‑COVID levels, there has nonetheless been a very strong increase in job vacancies in both countries.

In fact, trends in vacancies in the US and UK are not dissimilar to those in Australia.

Staying with the US for a moment, the US Federal Reserve’s most recent Beige Book noted that “most Districts reported that demand for additional workers remains strong. Job openings were up but overall payroll growth was constrained by persistent labor shortages.”

That combination in the US of lower employment levels than pre‑pandemic, but a surge in vacancies and persistent labour shortages would tend to lead to the conclusion that the deterioration in the ability of the labour market to match has been much more pronounced there than in Australia.

Or putting this another way, difficulties employers have in recruiting employees in Australia is more likely to reflect our generally strong labour market than a deterioration in the labour market’s matching abilities, relative to circumstances in the US.

Recruitment Difficulty

The NSC collects and publishes a range of data on recruitment difficulty, sourced from contact with around 14,000 employers each year through our Recruitment Experiences and Outlook Survey (REOS).

Over 2021 the growth in labour demand recorded in our internet vacancies series has also been reflected in the proportion of employers who have reported recruitment difficulty.  

Specifically, the surge in online job ads in early 2021, and again more recently since August 2021, is reflected in increases in the recruitment difficulty rate during those periods.

Another interesting trend is that recruitment difficulty has become more common in rest-of-state areas over recent years, with notable increases occurring from 2016 to 2018, and from 2019 to 2020.

The first time that recruitment difficulty in rest-of-state areas exceeded that recorded for capital cities was in 2020, likely reflecting the disruption caused by the pandemic to economic activity.

I should note here that the recruitment difficulty rate doesn’t relate to all employers, just those currently recruiting or who had recruited in the previous month.

Over May to December 2021 an average of 43% of employers in Capital Cities were currently recruiting or had recruited in the previous month, while in Rest of State areas 47% of employers were currently recruiting or had recruited in the previous month.

Recruiting employers are then asked if they had difficulty filling their most recent vacancies.

Of those employers that were recruiting over May to December 2021, 51% of employers in Capital Cities experienced difficulty in their most recent recruitment, while in Rest of State areas it was 58%.

That then corresponds to an average of 22% of all employers in Capital Cities who experienced recruitment difficulty in any given month (43% of employers in Capital Cities were currently recruiting and of those, 51% of employers experienced difficulty in their most recent recruitment) versus 27% of all employers in Rest of State areas that experienced recruitment difficulty. 

Recruitment difficulty doesn’t necessarily mean that positions go unfilled.

In Capital Cities of those employers that cited recruitment difficulty:

  • 19% of employers nonetheless filled vacancies within a month;
  • 23% filled vacancies but it took longer than a month;
  • 20% had not yet filled vacancies but had been looking for less than a month; and
  • 37% had unfilled vacancies for more than a month.

That said, some employers who fill jobs within a few weeks do indicate that they found it difficult to recruit staff with the right skills. This may mean employers have had to compromise or be more flexible in who they hire – such as hiring less experienced applicants and training on the job or changing the nature of a role to suit those applicants that are available.

Putting this together, over May to December 2021, an average of 43% of employers in Capital Cities recruited in a given month, with 51% of those experiencing difficulty in their most recent recruitment, and 37% of those being unable to fill their vacancies for more than a month. All up that corresponds to 8% of all employers in a given month. In Rest of State areas this rises to 11%.

The REOS also asks employers why they think they are experiencing recruitment difficulty. Here the most common reasons employers cite include not enough applicants, or a lack of suitable applicants, a lack of technical skills or a lack of experience. In regional areas a relatively high proportion of employers also cite their location as a barrier.

We also have some insight into the nature of jobs that employers are finding it most difficult to recruit for. Generally, these are higher skill level jobs – where employment growth has also been the strongest since the start of the pandemic.

Jobs growth during the pandemic

Indeed, employment in Skill Level 1 Occupations has increased by 315,400 (or 7.5%) with Skill Level 2 Occupations increasing by 20,300 (or 1.3%) since February 2020. By comparison, employment for Skill Levels 3, 4 and 5 Occupations has fallen by 208,400 (or 2.9%) over the COVID-19 period.

The largest decreases in employment since February 2020 were recorded for Skill Level 5 Occupations (down by 135,200, or 6.6%), followed by Skill Level 4 Occupations (38,900, or 1.2%) and Skill level 3 Occupations (34,400 or 1.8%).

Somewhat counterintuitively, these employment growth trends are contrary to the percentage growth in job advertisements during the pandemic (where the lower Skill Levels have grown the most). In this regard, it is important to separate short-term job demand post lockdowns from more enduring skills shortages.

This brings me to the question of where we might be seeing labour shortages (reflective of a very tight labour market, the migration shock the economy has experienced on account of closed borders and other disruptions caused by the pandemic), versus more persistent skills shortages.

Put simply – and perhaps at the risk of some over-generalisation – at lower skill levels (especially skill level 5) – it appears labour shortages may be more at play; whereas at higher skill levels and for a number of technical and trades based occupations skill shortages have been more persistent over time.

Skill Shortages

To that point, one of the remits of the NSC is the identification of Skill Shortages. This work is ultimately reflected in a Skills Priority List. The Skills Priority List (SPL) outlines occupations that are currently in shortage as well as their expected future demand.

In the list published last year shortages were identified in 153 occupations (19% of assessed occupations) nationally.

Shortages are most common in the Technicians and Trades Workers occupation group, with 42% of occupations assessed in shortage.

  • Large employing Technicians and Trades Worker occupations in shortage include Electrician (General), Carpenter, Chef and Fitter (General).

Elsewhere close to a fifth (19%) of assessed Professionals occupations are in shortage, notably tech as well as health related occupations.

Interestingly, while methodologies for assessing skills shortages vary between countries, international findings tend to suggest global, not just local skill shortages.

For example, the UK conducts a regular survey to identify skills needs. The most recent survey from 2019 shows that the most challenging occupation group to fill vacancies for was in the Skilled Trades.

The European Foundation for the Improvement of Living and Working Conditions and the European Commission analysed skill shortages in the Euro area after the start of the COVID-19 pandemic.

Their work found that in 2020, nurses and other health professionals were among the occupations with the most critical shortages in most Member States, followed by ICT professionals, skilled trades, technicians and heavy truck and lorry drivers.

Returning to Australia, our most recent surveys of employers who have recently advertised suggests that the labour market tightened during 2021 for both Professionals and Technicians and Trades Workers. Employers appear to have filled a smaller proportion of advertised vacancies across both occupation groups compared with the previous year. This result likely reflects both the strength of the labour market and shortages already evident.

At this point it’s probably worth explaining how we define a skills shortage.

Our working definition is that skill shortages exist when employers are unable to fill or have considerable difficulty filling vacancies for an occupation, or significant specialised skill needs within that occupation, at current levels of remuneration and conditions of employment, and in reasonably accessible locations.

There are therefore a range of factors, beyond the provision of formal training, that might result in skill shortages and see them persist. Indeed, as the Productivity Commission noted in their review of the National Agreement for Skills and Workforce Development, data from the predecessors to the National Skills Commission “suggest highly persistent skill shortages in a range of occupations”.

I’ve noted previously that some reasons for this, drawing on both the PC’s review and our own thinking and data, could include:

  • employers wanting more advanced soft skills or on the job experience, things that are difficult to provide through formal training alone;
  • Skill mismatches occurring geographically with there being a mismatch between where those seeking work are located and the work itself;
  • The labour market itself may be too rigid;
  • An employer might have a need for a highly technical or specialised skill which is emerging and hence might not yet be reflected in the training system; or
  • There may be mismatches between the preferences of employers and potential employees.

As I’ve noted in the past, these highlight the importance of flexibility in labour markets, labour mobility, jobs themselves and the training system – as well as the importance of the insights offered by the National Skills Commission – if we are to effectively address skill shortages and prepare our workforce for the future.

A Regional Lens

One of the challenges associated with economic and labour market forecasting is the challenge of knowing exactly where we are right now.

That’s particularly the case if we want detailed labour market data.

For example, ABS data on employment by occupation and region are only available from the five‑yearly census.

Until recently we simply didn’t know outside of the census how many electricians were employed in the Illawarra region, for example.

To help address that the National Skills Commission has developed monthly estimates of employment by occupation and region. This data set provides estimates for over 350 occupations across more than 80 regions. Over 30,000 individual series.

It’s a first step in using big data and nowcasting to provide a clearer and more detailed assessment of labour market trends.

While I think it’s highly unlikely that we’ll be forecasting in excess of 30,000 individual data series – this is not an exercise in claiming we will know exactly how many plumbers Bega will need in 10 years time – understanding developments and trends at disaggregated level and more frequently than provided by the five-yearly census is major step forward.

And, by combining these estimates with trends in job vacancies – also at a detailed level - and our skills priority list, we can start to assess where some of the most pronounced shortages might be at a regional level.

Conclusion

I often come back to a speech by former RBA Governor Glenn Stevens – his 2015 address to this group’s annual dinner. In discussing the keen interest displayed in changes to the RBA’s forecasts Mr Stevens made the following comment:

“the far more important question is whether we have recognised and understood the big forces at work. Even if we cannot predict the outcomes with great accuracy, an understanding of these forces ought to help us get policy responses roughly right.”

With that thought in mind there would appear to be a number of ‘big forces at work’ when it comes to skill and labour shortages.

The first is the strength in the labour market. Let’s not forget this is a good thing!

The second would be the ability of the market to match efficiently. While there has been some shifting out of the Beveridge curve in Australia, it is much more pronounced in the US. Given the disruption that COVID‑19 has caused, some move out should not be surprising.

  • Here the work of the NSC in assessing the economy’s current, emerging and future workforce skills needs and providing that evidence base to Government should help our education and training system to more closely meet labour market needs.

The third would be the population shock the economy has experienced over the past year on account of closed borders. That would seem to have played some role in relation to labour shortages, most likely in some lower skill level occupations.

  • In this regard decisions by the Government to enable the return of international students, as well as extending work rights for some migrants in Australia will help to ease these pressures.
  • As will a range of programs designed to encourage more Australians into the labour market.

The fourth dynamic would be that some skill shortages have existed over time, both here and in other economies.

  • That said, the recent surge in apprenticeship commencements will help to address some of those more persistent shortages.  

Finally, as we navigate through the challenges that a very strong and tight labour market can present, it’s important not to forget the big picture dynamics that will shape skills needs into the future.

Some of these dynamics include:

  • The ongoing shift toward services industries and sectors;
  • An ongoing shift toward higher skill level occupations;
  • The ongoing robust percentage growth in employment across STEM occupations; and
  • Some of the most important and rapidly growing skills needs over the coming years being centred around what we call the four ‘C’s:
    • Care – the group of skills responding to an ageing population
    • Computing – a group of skills needed to respond to the digital world and increasing use of digital technologies
    • Cognitive abilities – the group of advanced reasoning and higher order skills computers cannot easily replace; and
    • Communication – skills needed to collaborate and engage within and across the workplace.

As a concluding comment, I’d just like to reiterate one point that we seem to be in danger of forgetting in discussions around skill and labour shortages.

And that is this: it is much, much better to be at full employment than not.

Even if full employment comes with its own set of challenges.