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2.2.4.1. Supply

Supply includes all inputs up to the time when a skill is operationalised in a workplace. This includes not only its development in the education and training systems, but the informal and formal processes by which employers provide specific training in the workplace; the learning which workers undertake on their own initiative through such means as taking courses at their own expense, reading and internet searching, observing colleagues at work, asking questions and practice; learning by doing, individually and collectively, in specific workplace environments; and new practical knowledge which is developed in work teams, especially when engaged on innovative projects. It also includes the processes by which skill, once developed, is maintained and kept relevant to the needs of industry, and those by which it is made available to employers as they require it. The important criterion in all these cases is that skill in the supply phase represents potential for productivity rather than an active input to current productivity; this is what distinguishes supply from deployment.

Figure 2.4 Components of supply DEPL OYME NT SU_PP LY DEMAND DEPL OYME NT SU_PP LY DEMAND DEPL OYME NT SU_PP LY DEMAND DEPL OYME NT SU_PP LY DEMAND Allocation Allocation Retention Skill in worker Worker in occupation Retention Skill in worker Worker in occupation Development Updating Formation Upgrading Recruitment Development Updating Formation Upgrading Recruitment

The activities embraced in supply, and the institutional forces that drive it, are best explained jointly, but in three main subdivisions.

Development:

This term covers the processes by which skill is developed in members or potential members of the workforce who do not currently possess it. These processes in turn fall into four sub-categories. Recruitment is the decision by members of the workforce or potential entrants to it to acquire the skills necessary to pursue a given occupation or class of occupations, e.g. the choice to seek an apprenticeship, to apply for entry to a particular faculty at university, to join an organisation with an internal labour market and its own training program, or to undertake the training necessary for a promotion or change of job. Formation covers all the learning processes and infrastructure which enable a worker to acquire that initial armoury of skills. Updating means the processes by which skill, once acquired, is kept relevant to the changing demands of the

workplace. Upgrading means the further development of those skills, whether by formal or informal means, so that the bearer is able to do things which someone with a normal or basic competence in that field would not be able to do. It thus embraces the means by which such characteristics as mastery (Braverman, 1974), expertise (Swap, Leonard, Shields and Abrams, 2001: 97) and virtuosity (Attewell, 1990: 433) are developed, and by which generic skills become specialised or personalised; Retention:

This set of processes is necessary to ensure that a skill, once developed, remains current and available to contribute to productivity. The two components are the retention of the skill in the worker, which generally means that the worker has enough continuing opportunity for exercising the skill to prevent it from decaying; and retention of the worker in the occupation, implying that the holder of a given set of skills has sufficient incentive and opportunity to remain active in the kind of work to which that skill set is relevant, rather than moving into a different occupation which offers better rewards or working conditions but does not use his full skill base;

Allocation:

Once skills have been created, some processes are required to ensure they flow to employers who need them. These processes occur both within the labour market, and through non-market agents such as government-run employment exchanges and non- market processes such as the voluntary sharing of skilled or expert labour between firms. The system-level function of these allocative mechanisms is to direct the available skilled workforce to those employers who can make the most productive use of each type of skill. Two main factors determine how efficient this process will be. The first is information – information for employers about what skills exist in the workforce and where, about the kinds of remuneration and working conditions required to attract each kind of skilled labour, and about how useful these skills could be either to their existing business activities or to potential areas of new business strategy; and information for skilled workers about what requirements exist, and where, for their particular mix of skills, which employers offer the most attractive wages and working conditions, and where they are likely to get the most second-order benefits (e.g. in prestige, promotion prospects or wider subsequent career opportunities) from exercising their skills. The second is labour mobility, which in turn has a locational dimension (how feasible and attractive is it for skilled workers to move to those locations where their skills can be most productively deployed?) and a temporal one (how quickly is it

feasible or attractive for skilled workers to move to a new job when one comes into existence that will make more productive use of their skills than their present job?). From this account it should be clear that formation, the primary focus of policy discussion about the supply of skills, is only one of multiple factors contributing to the genesis of skill. Beyond that, the performance of the supply mechanism – whether in terms of the effective functioning of the system as a whole, or in terms of its effectiveness in filling higher-order social or economic objectives - cannot be adequately described just or even predominantly in terms of the efficiency, output or responsiveness of the training infrastructure.

DEPL OYME NT SU_PPL Y DEMAND

Development

Retention

Allocation

Information Industrial structure Wages and conditions Social prestige Education VET Organisational learning Workplace learning Wages and conditions Information DEMAND D EP LO YM EN T Labour mobility Figure 2.5 Determinants of supply

Taking as an example the severe skill shortages which emerged in the building trades in the early 2000s, it can be assumed for the purposes of argument that they resulted in part from underinvestment or undercapacity in building trades apprenticeships in the 1990s, some of which may have been attributable to the public VET system. However, a part of the shortfall might equally be attributable to a decline in the popularity of apprenticeship among school leavers around that time or earlier – i.e. a recruitment failure which would have inhibited an adjustment to the increased demand even if there had been spare capacity in the training system. Another strong contributor might be the relatively high proportion of building tradespeople who had made new careers outside their trade and were at least initially unable or unwilling to move back when demand revived – a retention failure. A third element, especially relevant to areas where the mining industry expanded rapidly over this period, was that few building tradespeople were willing to move to remote areas with

poor facilities for workers and their families – an allocation failure resulting from

inadequate geographic mobility of labour, which was exacerbated by the contemporaneous excess demand for skilled labour in more attractive locations. This is aside from the arguably more important question of whether the shortage was driven by supply

considerations in the first place, or whether it resulted primarily from a rapid cyclical or policy-induced spike in demand to which even the most efficient supply mechanism could not have responded adequately.

The question of causality will also often be complicated when the same institutional forces exercise divergent or contradictory influences on different elements of the supply

mechanism. An institutional culture that favours strong attachment between employees and firms, generating loyalty, trust and long-term security, represents a form of “patient social capital” which can be essential to the creation and upgrading of specialised high-level skills for which the training takes many years to show net returns; but it can also set back the efficiency of allocation by inhibiting the migration of labour with such skills to start-ups which might be able to use them more flexibly and innovatively.

Feedback can also have important impacts on the outputs of the supply mechanism, most notably in the form of lagged response, as noted earlier in this chapter. Once again, the core problem is not one of training infrastructure capacity alone, but a combination of recruitment, capacity, retention and information problems, and in different cases it may require intervention in any one or any combination of these mechanisms to alleviate the imbalance.

Given these complexities, the aggregate supply of skills at any point in time is extremely difficult to quantify, even in concept. The kinds of indicator commonly used – the output of graduates from the formal training system, hours of training undertaken in workplaces and the number of persons in the workforce holding each type and level of qualification - not only fail to capture the contribution of informal and emergent learning in workplaces, but overlook the fact that a skill, once formed, does not persist as a permanent and

unalterable feature of the economy. Skills are modified and developed in use to the point where they eventually can no longer be called the same skills, they decay from disuse, and they become obsolete or irrelevant to current needs. While it is possible to identify and to some extent quantify gaps between demand and supply, or between supply and deployment, the actual quantum of supply remains permanently uncertain in its own terms. This

complicates the task of finding a metric for the activity or state of the skilling system at any given time, a question that will be further addressed in Section 2.4.

2.2.4.2. Demand

Estimating demand poses comparable problems of definition. One way to conceptualise it at the system level would be to ask the hypothetical question: if every employer in the country wished or needed to re-fill all the positions in their current workforce today with new appointees, what qualifications, experience and other competences would they require (and be prepared to pay the going price for) in each of those recruits? But such a definition, though defensible in principle, is so hypothetical in that it sheds little light on the demand actually influencing the dynamics of the skilling system at any point in time. The model set out below subdivides demand into the ways it appears to different interest groups, in each case implying a different definition.

Vacancy demand is defined in terms of the levels and types of skill required to fill all the positions which are actually vacant at any given time and the object of current action to fill them. This is the demand that shows up, for example, in the national vacancy statistics, and is the kind most relevant to current jobseekers, most employers, employment exchanges and agencies, and lay observers of the labour market (including politicians).

Projected demand means the skill requirements that will exist if present trends in each type of employment are prolonged, say, three, five or ten years into the future, and the skills required for each type of job remain as they are today. This could include making allowance for the likelihood that the present vacancy demand for some skills represents a cyclical spike which will not be sustained. This kind of demand is the most relevant to school leavers choosing a long-cycle training option, to larger firms planning internal skill development strategies, and to training

organisations when they undertake capacity planning.

Replacement demand covers the skills that will be needed to fill those positions likely to become vacant over a given planning timeline as a result of churn or retirement. This is likely to be of interest to the same groups as projected demand. However, because it is affected by large-scale demographic shifts (e.g. the

retirement of the baby-boomer generation), it may sometimes be beyond the capacity of individuals or individual firms to respond adequately to it, so that governments and other collective institutions need to take greater responsibility; Dormant demand refers to skills which employers would like their present workforce to possess in order to do their present jobs, but are not actively

attempting or intending to gain through recruitment. This may happen because they have no confidence that the missing skills will be available on the open labour market, because they lack the resources or motivation to recruit additional staff or pay the going market rate for the skills in question, because of undesirable tradeoffs (e.g. loss of internal trust, or loss of firm-specific tacit knowledge) that would arise from laying off existing employees to replace them with better-skilled ones, or because of constraints on doing so, e.g. industrial laws or union bargaining power. This kind of demand includes what are generally called skill gaps, i.e. where an employee meets the qualification requirements to do a particular job but lacks some of the practical skills or current knowledge that are required to do it well. Firms with sufficient capacity may try to equip their current staff with the missing skills through enterprise-based training, but many will simply make do without them and adjust their strategies and expectations. This kind of dormant demand has heavily influenced advocacy by peak employer groups (e.g. ACCI 2007; Australian Industry Group 2004);

Potential demand is made up of skills which employers would use if they were more readily available, e.g. to move into new areas of business, to step up their activity in their current ones, or to upgrade their production processes. The category also embraces demand from new businesses or new sectors which would emerge if a suitable skills base were available. Unlike the other kinds listed above, which assume a static balance between different types of economic activity or between the growth rates of different industry sectors, potential demand is based on the expected presence in the economy of dynamism, innovation and structural change; but for

just that reason, it is much harder than the others to forecast consensually and to quantify or prove objectively. This kind of demand is particularly relevant to long- term economic and educational planners and to students of innovation.

Figure 2.6

Components of demand

Except for the first, all the above categories go some way beyond the hypothetical point-in- time demand estimate which introduced this topic. They all have a future orientation and assume the working-through of changes which are already present in embryo in the current structure of industry. Between them, in effect, they ask the same underlying question as the original hypothetical, but answer it with reference to a point in the future. From the point of view of a descriptive economist focusing on the economy at the present point in time, only vacancy demand would strictly qualify as demand. However, from a strategic and policy viewpoint it is rational to use such a future reference point, given the inevitable lag which has already been mentioned between changes in demand and the response of the supply side.

Another way of explaining the difference is that the original hypothetical calculation was an estimate of a stock – the volume and mix of skills which either are actively in demand across the economy at a point in time, or else are in active use, and hence would be in active demand if their current practitioners ceased to work for any reason. The subcategories refer to aspects of the flow of skilled labour between different kinds of economic activity. Among these latter, vacancy demand represents manifest demand, whereas the remainder represent latent demand. The dynamic on the demand side of the labour market can thus be conceptualised, in part, as a process by which latent demand becomes manifest. However, latent demand also evolves in its own right as the economic structure, product markets, technology, labour force demographics and firms’ practices change, and this provides the second and arguably more important element to the dynamic. Given that only highly anticipatory policy responses are likely be effective in addressing demand-side challenges, there would appear to be more value in mapping the trajectory of latent demand in its various forms. From that perspective, the size and composition of the present “stock” of demand appears to have subsidiary relevance at best.

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