Changing Skills Demand in the Workplace:

Global and Regional Perspectives

SeminarGrowth Strategies

for Secondary Education in AsiaSeptember 19-21, 2005Kuala Lumpur, Malaysia

Hong TanLead Economist, WBI

Goals of Presentation

Provide an overview of global trends and their likely impacts on the labor market and on skills demand in the workplace

Skills broadly defined to include formal education (secondary & tertiary in particular), vocational education & training, and training within firms

What skills will be in high demand in workplaces of the future, and what role will they play in raising incomes, improving productivity & competitiveness

What issues do these raise, and what implications will changing skills demand have for education and training policy

Key Global Trends Affecting Labor Markets and Skills

Economic Restructuring Transition economies – from planned to market

economies Downsizing of the public sector, privatization of

SOEs, growth of the private sector Shift from agriculture to industry and services

Globalization and International Trade Integration into international markets Foreign capital and labor flows Technology transfer to developing countries

Growth of the Knowledge Economy Growing importance of information and knowledge in

production of goods and services Diffusion and use of information and communication

technologies (ICT)

There has been a shift from agriculture to employment in industry and services …

Early 1960’s

1980

Late 1990s

0 10 20 30 40 50 60 70

World

Middle East & N.Africa

Sub-SaharanAfrica

Latin America &Caribbean

Asia

E. Europe and C.Asia

High income

ILO, World Employment Report, 2001

Service sector employment – 1960s to 1990s

And restructuring that often tends to increase job turnover…

making jobs and job security more volatile

Job creation and destruction

-20

-15

-10

-5

0

5

10

15

20

% o

f to

tal em

plo

ym

en

t

J. creation, new firms J. creation incumbents J. destr. exits J. destr. incumbents

United States

1.4

1.45

1.5

1.55

1.6

1.65

1.7

1.75

1.8

1965 1970 1975 1980 1985 1990 1995 2000

Rat

io o

f h

ou

rly

wag

es

College Plus/High School Wage Premium 1967-1997

Source: Murphy & Welch, Relative Wages in the 1990s, unpublished

Rising relative returns to higher education in many OECD countries…

College Wage premiums risen in US in the past 2 decades

Source: Blom, Holm-Nielsen, and Verner, “Education, Earnings and Inequality in Brazil: 1982-1998” World Bank (2001)

As well as some developing countriesFor example, Brazil and Mexico

60

70

80

90

100

110

120

130

1982 1984 1986 1988 1990 1992 1994 1996 1998

Tertiary

Upper sec

Primary

Lower sec

BRAZILSimilar changes over time seen in Mexico with returns to higher education rising and that to primary education falling-- Lachler (1998), “Education and Earnings Inequality in Mexico”

Driven in part by trade liberalization …

Sanchez and Schady (2002) find coincident timing of trade liberalization and widening then narrowing relative wages of the more highly educated Chile reformed first -- mid-1970s to 1980s – followed by

Mexico, then Argentina, Colombia, and Brazil in 1990s Relative wages of more educated widened then narrowed

first in Chile, then Mexico, though the last 3 countries have yet to narrow

Explanation: Integration into world economy is like a technology shock, with a transitional increase in demand for more educated workers, and a rise in their relative pay (at least until supply response)

Annual Growth Rate of Skilled Employment in Selected Countries, 1981-1996 (in %)

-2

0

2

4

6

8

10

Total Employment Professional and Technical

ESkilled jobs have grown faster than less skilled

jobs despite higher pay

Possible Explanations for Rising Relative Skills Demand

Skills-Enhancing Trade — imports of capital equipment—complementary with skills and embodied technology—raise relative skills demand (Robbins)

Skill-biased Technical Change — new technology developed in skill-abundant advanced countries are skill-biased, and raise relative skills demand in developing countries through technology transfer (Berman)

Skills Adaptable to Change – in periods of change, education and training that enhances “ability to deal with disequilibrium” is more valued, and in greater demand (Schultz, Welch)

Skill-biased Technical ChangeEmpirical Evidence

Tests of SBTC in labor demand studies: Industrialized countries -- Autor, Katz, and Krueger

(1998) for the USA, Machin and Van Reenen (1998) for OECD countries

Developing countries -- Tan (2000) for Malaysia; Pavcnik (2002) for Chile; Hur, Seo and Lee (2003) for Korea

Strong evidence of: Capital-skill and capital-education complementarity SBTC as shown by positive relationship between wage

(employment) shares of tertiary educated and skilled occupations and R&D expenditures and use of new technology

Magnitude of this training sector not often apparent to educators / policymakers In fact, investments in continuing education and training may exceed investments in formal education Growing body of evidence on post-school training based on individual data. Main findings:

More educated workers not only get more training, they get training more often over their worklife Returns to training are substantial and comparable to the returns to education Training and the returns to training are higher in industries that experience faster technical change

Source: Lillard and Tan (1990), Private Sector Training: Who Gets It and Why?

Same Forces Operating for Post-School Training of Workers

And in Enterprises Some Stylized Facts about In-Firm Training

Training level differences by countries’ income level

Within countries, uneven incidence across firms higher among larger firms, FDI firms, export-oriented

firms, and in higher-tech sectors Educated workers more likely to get training Most important training sources

in-house programs, private schools. buyers and suppliers public training institutes are a less important source Higher productivity impacts of in-house and private

sector training vs training from public sector providers Strong empirical evidence that training is

associated with increased wages and productivity Cross-sectional survey data as well as panel firm data

Incidence of In-Firm Training Variesacross regions and countries

Incidence of formal training by region

0.00

10.00

20.00

30.00

40.00

50.00

60.00

South Asia Af rica Europe and

Central Asia

East Asia Latin America

and the

Carribean

Total

Percentage of firms that train formally

0.00 10.00 20.00 30.00 40.00 50.00 60.00 70.00

PakistanMorocco

IndiaPhilippinEthiopia

BangladeUgandaZambia

MoldovaNicaraguTanzaniaElSalvad

KenyaMalaysia

HondurasGuatema

PolandBrazil

EcuadorChinaTotal

Source: Investment Climate Surveys in 20 countries (early 2000s)

Within countries, incidence of training varies across firms by technology level

Train by innovation

0102030405060708090

% Don't innovate

Innovate

Source: World Bank Investment Climate Surveys

Malaysia: Training Associated with Recent Introduction of New Technology

0

10

20

30

40

50

60

70

Micro Small Medium Large

new technology in last 3 years

no new technology in last 3 years

% increasing training investments

0

10

20

30

40

50

60

70

Micro Small Medium Large

increased training in last 3 years

Productivity Effects of Training -- Taiwan 1986

0

20

40

60

80

100

%

ApparelTextile

Chemicals

TransportElectronics

Plastics

Paper

High-Tech FirmsLow-Tech Firms

And productivity impact of training is greater with new technology

Source: Tan, Aw and Batra (1995)

Firm-level studies consistent with SBTC Bresnahan-Brynjolfsson-Hitt (2002), US (379 firms)HJ Seo – JJ Hur (2004), Korea (2000 firms)H Tan (2000), Malaysia (2,300 firms)

ICT adoption / intensity of ICT use correlated with:changes in work organization – from vertical to more decentralized and team-oriented organizationsincreased screening of new hires, use of educated labor, in-service training, and use of quality control methods firm performance and competitiveness

ICT Changing Work Organization and Demand for Education and Skills

Tan (2000) “Malaysia: Technology and Skill Needs”

Panel study of adoption of ICT (12 types), skills and its productivity outcomes. Main Findings:

Probability of ICT adoption positively related to skill mix of workers, skilled occupations in particular Employers deliberately alter skill mix prior to ICT adoption, to include more professional, technical and skilled workers Evidence of productivity (learning) gains with years of experience using ICTLearning gains from ICT adoption larger for training firms than for non-training firms – after 4 years, 31% gain versus 14% gain

ICT, Skills, and Firm Performance Example of Malaysian Manufacturing

More workers with more education – rising relative pay reflects growing demand for more educated workers

Skills that are portable across jobs – rising job turnover favors broader skills set rather than specific ones

Competencies demanded by employers – problem solving, numerical skills, ability to work in teams, and communication skills

Familiarity with ICT – growing demand for IT skills

Ability to learn – changing economic environment and work organization requires continuing education & training in the workplace

Summary Skills Demanded in the Workplace

Improve Supply-Demand Match for Education and Training

Better labor market data on skills demand and its supply from ALL providers of education and training, both public and private Provide information on career opportunities, and the associated returns to different educational, training, and career choices

Expand Access to and Quality of Education and VET

Expand enrollments in higher education and vocational training institutions as warranted by market signals Financing constraints will require opening up sector to private education institutions and private training providers Reform education and VET institutions to make them more responsive to market and employer needs

Summary and Implicationsfor Education and Training - 1

Better coordinate education and training system

Many countries have fragmented education and training systems under different agencies, often duplicating offerings and with no transferability of skills across institutions. Skill demands vary and skill needs may be better met by some institutions – either public or private – than by others

Caution in Vocationalizing Secondary Education

High cost and questionable relevance of vocational education to employer needs Rising job and occupational mobility makes more general, broad competencies more important than specific vocational education Job specific training best left to private sector and employers who know their skill needs But this will vary depending on country institutions

Summary and Implicationsfor Education and Training - 2

Accreditation of Education and Training Provide quality assurance to potential users – institutions, students, workers and employers – about quality Promote recognition and mobility of credentials, and multiple pathways to skill acquisition both pre- and post-labor market entry Potentially important way of reflecting employers skill needs in establishing education and training standards

Curriculum reform improve content and pedagogies to strengthen problem solving, learning-to-learn skills, provide training in IT and languages for work in global economy and environment of change

Summary and Implicationsfor Education and Training - 3