Episode 15 – Does Europe have the skills it needs for a changing economy?

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00:00:33 Mary McCaughey
Hello everyone, and welcome to this edition of Eurofound’s podcast series. Today Eurofound talks skills. We're going to talk about labour shortages. We're going to talk about skills. We're going to talk about Europe’s workforce being prepared for the challenges it faces into the next period. We've seen increased demand in several sectors and occupations and we've seen shortages developing in many other sectors and occupations. These are the key challenges that became the central points of this year's European Year of Skills, where the focus is very firmly placed on this area. 

In today's podcast, we're going to delve into the different areas of skill shortages and the issues they raise. It's not limited to training and it's not limited, indeed, to skills itself. We're looking at job quality. We're looking at also the other issues which need to be addressed to ensure that the European Union has a workforce that can deliver in the context of these different transitions, to ensure that we achieve the economic, social and environmental goals. 

Today I'm delighted to discuss this, that we have your Eurofound’s research manager Tina Weber and Senior Research Manager Gijs van Houten, and indeed, today for the first time, we're being joined by Giovanni Russo, who is a Senior Expert at CEDEFOP, which essentially is the EU’s agency for skills, the European Centre for the Development of Vocational Training, which is based in Thessalonica. Eurofound has a long history with CEDEFOP and we work jointly with them on several projects, not least the joint European Company Survey which took place in 2019. So, you're all very welcome. 

Let's start, Tina, with you. I always like to get a big picture of what we're talking about, so maybe you can give us an idea of what we're talking about in terms of the skill shortages, what we're talking about in terms of vacancies and what we're seeing in terms of developments at this stage into the future

00:02:30 Tina Weber
Thanks, Mary. I don't want to be too theoretical, but maybe if I can start with a bit of clarification, because the term skill shortage and labour shortage are often used interchangeably and they're not really. Skill shortage to me is a part of labour shortage, so the definition that we use in Eurofound is that a labour shortage is when the demand for labour and the supply for labour are mismatched. So, the number of workers that possess the right skills and are willing to work for a specific rate of pay, in specific working conditions and in a particular place and point in time, when there is a mismatch in that. Skill shortages are part of that, but it's broader. 

So, when we look at labour shortages more generally, we have three main indicators that are available at the EU level. You have the job vacancy rate, you have the business confidence indicator, and you have an annual data set from EURES, which is the body that helps with job-matching across borders, on the occupations where there is a surplus and shortage. 

If you look at the job vacancy rates, the first thing to note is that they have really increased in recent years. Ten years ago, it was 1.3%, now it's closer to 3% and there was only really a minor decline during the pandemic, which is maybe surprising, and the highest shortage in terms of sectors you can find in construction, in STEM, professional and scientific, in accommodation and food services, ICT, and health and care. For the business confidence indicator, it is when employers are asked ‘is the difficulty in finding labour a factor that limits the delivery of services or production?’. That has also really increased, from about 5% to 25% now.

00:04:41 Mary McCaughey
25%?

00:04:42 Tina Weber
Yes, that's the first quarter of 2023. And that is now highest in services. You only get very broad sectoral descriptions. So, you only have services, manufacturing, construction, and it's highest in construction at the moment. The EURES data is at the more granular occupational level, and here the main shortage occupations tend to be the kind of skilled crafts you would need in construction, like bricklayers, plumbers, electricians, etc. And then you have the health and care professions, nurses, GPs and so on. The hotels and restaurant sector is one that is a little bit newer. So, very much post-COVID, you saw an increase in shortages in those sectors.

00:05:36 Mary McCaughey
So, clearly an issue for employers as well as the clear distinction between 1.3% rising to 3% in the vacancy rates. In terms of the countries, are we seeing particular issues raised in certain countries?

00:05:51 Tina Weber

Yes, the level of shortage is very different from country to country. At present, the highest shortages you would find in countries like Czechia, the Netherlands, Austria, Germany, and the lowest rates of shortage are in countries like Romania, Bulgaria, but also Portugal and Spain, the countries that took the longest to recover from the previous crisis, so there the level of shortage is still not quite as high.

00:06:17 Mary McCaughey
And, Tina, in the introduction I referred briefly to the various transitions that we are experiencing. Clearly there's a lot that needs to be done to embed them and integrate them into our economic and social fabric. In particular, though, I'm looking at the climate goals and reducing emissions by at least 55% by 2030. How do you think or what do you see in terms of the research, how that is likely to impact on labour and skills shortages in the coming years?

00:06:52 Tina Weber
There's a lot of research that has been done to try and estimate what is the overall employment effect of the ‘Fit for 55’ goals and they generally show that the overall impact is somewhat positive, so between 1 and 3 million additional jobs, but of course that varies very significantly from sector to sector. We see a likely decline in demand for manufacturing jobs. Interestingly, an increase in demand for workers in construction, business services and services more generally, but then you need to look at it more again at the granular level. Who do we need in construction? We need a much greater focus on the kind of skills that are to do with retrofitting homes. So, it might not be entirely different jobs, just different skills needed for electricians, you know, whatever the kind of professions. Our most recent research also interestingly finds that the most likely gains are in the lower and the higher paid spectrums, so less in the middle, which is quite an interesting phenomenon.

00:08:13 Mary McCaughey
Clearly, from what you're saying, the research is showing us that there will be a requirement to adjust skills in respect to responding to these different transitions, green, but also digital and possibly even demographic.

00:08:28 Tina Weber
Yes, the most evident and easily identifiable example is the energy sector, where you see this transition away from coal and the carbon-intensive energy sectors to renewables, which require entirely different skills. There's a need to re-skill the workforce and to provide an opportunity to shift to some of those new job opportunities.

00:09:00 Mary McCaughey
That's looking very much at the labour shortages aspect, as you've defined there the difference, and the subset being the skills shortages. Getting down to that level Gijs, when we're looking here at bigger economic goals, how we need to adjust. But how is it happening at the business company level? How are we looking at utilising the skills of workers? Maybe the Company Survey has been able to tell us something about this. Can you give us a bit of an insight there?
                
00:09:27 Gijs van Houten
Yes, for sure. I think Tina did make a very important distinction between the skill shortages on the one hand and labour shortages on the other. Because what we've been looking at in the Company Survey – which I think is a very unique exercise and there's not very many multi-country company surveys out there – what it looks at is workplace practices with regard to work organisation, human resource management, training and, very importantly, direct and indirect ways of employee participation. What it shows is that there's a lot to gain in businesses in terms of making use of the skills of the staff that they have. Many businesses tend to view their employees rather as a liability than as an asset, so it's a cost and not necessarily a gain. 

I think the data shows pretty clearly that those businesses that have a more people-centred approach, where they take the opinions and skills and knowledge of their employees very seriously and put practices in place that tap into this, they fare better. They have happier employees and they have better performances. We dug into that deeper in the most recent report. We looked at what are the mechanisms that make sure that these, let's say, broader beneficial working conditions result in a better use of skills. We use the theoretical model, which is the AMO model, it looks at ability, motivation and opportunity. The argument is that in order to get the best out of your employees, you need to make sure that they have the right skills to do their jobs and also the opportunity to keep developing them to maybe do their jobs better, or to do different jobs. They have the motivation to use those skills and the opportunity to use those skills. Because, quite often, people are being put in a situation where actually they're only using a very limited part of their skill set, and they might not have the autonomy to take on more complicated tasks that would allow them to use a broader set of skills.
                
00:11:23 Mary McCaughey
So, we know in fact that that investment in skills or investment in growing your worker and ensuring that they are able to exploit their skills and their development is assured within the organisation. We know that that's good for them, but we also know that it's good for the business and for productivity and the company.
                
00:11:41 Gijs van Houten
Yes, and arguably it's not just investing in skills. You need to provide an environment in which workers are happy and keen to actually apply them.
                
00:11:51 Mary McCaughey
Which is a story we're seeing across the European Year of Skills, that it’s not just about skills, it's about so much more to ensure that we facilitate the development of these skills, etc. In terms of that, being more specific, how have businesses been adapting to ensure that they get the best out of their workers?
                
00:12:08 Gijs van Houten
Well, the survey doesn't really show changes in the behaviour of businesses. We don't know how businesses have changed in terms of how they apply the practices, so if you want to turn it around, what we find is that businesses that invest more, particularly in the autonomy and the job discretion of workers, they fared much better during COVID. They are actually more adaptive rather than have been adapting, because when you give workers more freedom in how to carry out their tasks and the order in which they do things, they get more creative and they're more likely to be able to face unexpected challenges than when you have a more rigid, control-based approach.
               
00:12:52 Mary McCaughey
That’s fascinating. So, in fact, it increases flexibility to some degree, and that responsiveness to these kind of crises, the perma-crisis situation that we are in.
                
00:13:00 Gijs van Houten
Exactly. You would expect that particularly these businesses that have these practices in place fare much better in terms of coping with the transition to green and transition to digital, generally are likely to be more innovative and that's also what our data shows.
                
00:13:14 Mary McCaughey
That's a very interesting part. Creating the environment that values skill development, in fact, is fundamental.
                
00:13:21 Gijs van Houten
Yes. But also just the recognition that you're dealing with people that are likely to have a much broader set of interests and skills than the particular skills that you've recruited them into your organisation for. It might not apply to all of the sectors, because I was thinking of a hotel setting, for example: is it really the case that all the pot scrubs have also skills with regard to waiting and could you move them around? But it might, and at least it's a first step that is maybe relatively inexpensive to take to have a broader recognition of the staff that you do have, the opportunities that you do have to face your challenges rather than immediately looking out at the market to fit exactly the right peg in the right hole.
                
00:14:05 Mary McCaughey
And clearly what you're saying is it's a win-win.
                
00:14:09 Gijs van Houten
Obviously, yes, and I think that's a very important point.
                
00:14:11 Mary McCaughey
It is an important point, particularly at this stage. Giovanni, when we're talking about this, you said it is more about looking at the demand side of these skill shortages. Maybe you can give us a quick insight into what your work has been in terms of looking at the skills demands and how they've been changing in Europe over the years.

00:14:37 Giovanni Russo
I want to take a little bit of a pause here and look at the demand side of what is going on, because this is a very strange shortage. If you think, recently we just had two instances of a shortage. We had in the US a shortage of goods, excess demand. In Europe we had a shortage of energy, it was the gas crisis. In both cases there has been a spike in price. When we look at the labour market and these shortages that we have, it is a very odd one because we don't see the spike in wages. I mean, inflation last year was at 9% but the increase in the hourly wage was only 5%, so overall there has been a decrease in the real wage, so that is really odd. 

And so maybe it is worth having a broader look at these things and I do think that the difficulties companies are experiencing are real, so they actually have difficulties in finding the skills they need, but this is because recruitment is a very difficult phase and this argument here is being downplayed. There was a recent article, a recent issue of the Journal of Applied Psychology looking back over a hundred years of research on recruitment, and this is why we have to recognise that this is a very difficult phase for each and every organisation. This is why this claim that they have difficulties in finding skills is so widespread. I think we need to focus on or at least consider these explanations. Looking at the Company Survey, there is a positive link between companies experiencing turnover and the difficulties they have in finding the skills. So, probably there is something there, but because we haven't really delved into this topic yet very much, so I want to put it out there as a complementary explanation to what we just said so far.

00:16:47 Mary McCaughey
It's an interesting element, I think, to consider. I mean, you've no solution to the problem, Giovanni. Certainly research at this stage is out on this.

00:16:55 Giovanni Russo
Yes, exactly. I think there is an issue. We have attempts to fill this, the quirkiness of the labour market. If you think about it, the labour market is a market without marketplaces. So, now there are job boards and the public employment services and there are intermediaries, but a lot of resource allocation is still driven by networks rather than marketplaces, as you know. So, it is a market which has its own specificity and we don't have to forget those things when we are talking about finding skills.

00:17:33 Mary McCaughey
OK, but you've talked there a little bit about recruitment and in a way you're suggesting there that there's room for greater education for management with respect to dealing with these skills and these skills shortages. Would that be right?

00:17:47 Giovanni Russo
Oh yes. But, again, I'm sorry, I know I'm creating mayhem now, but I think there is an original way to look at these things, because when you look at schools and universities, how they deliver the skills on the market, what you need before they can do anything is that there is a sort of an agreement, a settlement on the type of technology used. Once the technology is clarified, then universities and schools are very efficient in providing the skills needed by the labour market. But as long as there is attention on which technology will win, the whole school system cannot really commit to one technology or the other. 

There is another issue that is often forgotten in the role of education, which is managerial education. Gijs has just pointed out how this combination of ability, motivation and opportunity is what generates gains for the organisation, and the creation of opportunity and motivation of people is a very specific thing. I think not enough has been done in managerial education to educate our managers on how to approach these things and how important it is for the success and the resilience for the organisation to do that.

00:19:18 Mary McCaughey
So not just investment in the worker per se, but the manager is equally important to ensure that we tick all the boxes to try and address this issue.

00:19:30 Giovanni Russo
Yes, absolutely, there is an issue of managerial capital, if you want, that we have to build.

00:19:35 Mary McCaughey
That's fascinating, too. The discussion is going around, in a way, a core issue, which is that skills is not just about skills. I think previously we would have understood skills in a very sort of normative manner, whereas now we've expanded to understand it requires this ability-motivation-opportunity approach. We need to look at the labour market, we need to look at managerial capital, but I think we also need to look, and certainly in one of our previous podcasts, when we looked at working conditions and the Working Conditions Survey, we were looking at job quality and the impact that that has on filling these jobs in these particular sectors. If the working conditions are miserable in particular sectors, well then it's a bit of a no-brainer that we won't attract good workers, skilled or unskilled, to fill those posts. So maybe, Tina, can you talk to us a little bit about how you think we need to adjust efforts in that area to ensure that we harness the potential?

00:20:41 Tina Weber
Yes, it may be the European Year of Skills, but as you say, skills mismatch is not the only driver behind shortage, and the data that we have from the European Working Conditions Telephone Survey from 2021 clearly shows that many of the sectors and the occupations where we see skills shortages are the ones that in that report we call strained. They might have difficult, unsocial working hours, they might have high job intensity, they might have a lack of flexibility, which is what a lot of workers are now looking for, this ability to be geographically flexible or flexible in terms of when they do their working hours. They might be exposed to bullying, to harassment. Those are the strained jobs and these are things like healthcare, to some extent, also the transport sector, which is really facing a huge skill shortage, not just in Europe, but globally. That's another problem, because often the first reaction to a shortage is to try and attract also from other countries. In the health and care sector that can be a very dangerous thing, because you're just beggaring your neighbour, basically, taking skilled workers away from other countries. 

So, when we did our most recent research on policies to address these kind of issues, yes, there were examples of countries that have improved pay in these sectors, and I took note of what Gio said, that there is no real overall increase in pay. But, when you look at the public sector specifically, there has also been a lot of caution in many countries to increase public sector wages in an effort not to increase inflation further, so maybe that's also a factor. But, in any case, some countries have increased wages and there are some examples where that has happened, where the share of doctors, for example, that make applications to have their qualifications recognised to work abroad has gone down. This can have an impact, but it's not just about pay, you know, it's about working conditions more generally. It is about flexibility, it's about access to training. It's about your manager valuing you. It's about having access to progression, it's about working time. So, yes, it's not just skills. There's so many elements to working conditions that also have to be improved.

00:23:24 Mary McCaughey
I wonder if, Gijs, do you want to say, you’ll have seen something in the Company Survey about how that plays out also at company level?
                
00:23:34 Gijs van Houten
Yes. Well, what I was going to say is, when we say we're looking at ability, motivation and opportunity, arguably we're just looking at elements of what we define as good job quality, because the dimensions of job quality that we use to capture job quality at Eurofound are very similar to what we're capturing when looking at the workplace practices that foster ability, motivation and opportunity. And I think the Company Survey makes a very clear business case. It’s not just us saying, ‘oh, working conditions should be nice because they should’. We're saying ‘if working conditions are nice, you're much more likely to get the most out of your staff’. So, it's actually in your interest to invest in a good working environment. 

We even found that, because in the past we've been looking at these win-win outcomes, right? We said, ‘OK, what practices benefit both’. But now what we find is, actually, it's not just that these practices benefit both, ensuring that your employees are happy, investing in the well-being of your employees, benefits your productivity, so it works through improvement in well-being. We found, when we were looking at this AMO network, that the effectiveness of motivational drivers are much greater in an environment where well-being in general is high. So you need to first create good working conditions that create happy workers and then they respond much better to your motivational drivers than if you're in a situation where they're miserable and you tell them ‘you're doing a great job, here's more money’ – it’s not going to make much of a difference.

00:25:06 Mary McCaughey
It seems a bit like a no-brainer.

00:25:08 Gijs van Houten
You'd think so.
                
00:25:09 Mary McCaughey
Giovanni, do you want to add anything to that?

00:25:14 Giovanni Russo
Not apart from the fact that I'm totally in agreement with what has been said. There is a very important figure in economics, Herbert Simon, one of the founders of behavioural economics. He wouldn't speak about incentive, he would speak about inducement, because he has this broader view on what is an incentive. It is not only the money we give when we link monetary compensation to performance, it is a much broader package, which includes the quality of the job. So, if you look at it this way, basically a good-quality job becomes part of your inducement package and so you can support better performance in this way.

00:25:59 Mary McCaughey
Well, that's a perfect segue for me to include my own inducement package for the podcasts, where part of this is to ask all my guests to really talk to me about what you would put on the table to a policymaker if you had them in front of you for two or three minutes in the particular area we're discussing. Maybe I can start with you, Giovanni. What would be your main takeaway for what we need to keep in mind to ensure that we address the skills issue?

00:26:27 Giovanni Russo
I think I would go back to managerial capital. Yes, I think we need to create a class of manager who really understands how humans tick. This understanding is not something that is developed easily and it needs to be put in managerial education. If we do understand that, then we also understand how humans operate in technology, so we have this link about technology, let's say, powering up our productivity instead of replacing jobs. So, I think this is the important link at the moment, and I would talk about this to the policymaker.

00:27:04 Mary McCaughey
That's interesting, particularly in today's context when we're working remotely, there's hybrid work and there's different forms of telework. I think managers do need to find themselves a different role, in a way, that adapts to that whole new world of work. Thank you, Giovanni, for yours. Tina.

00:27:25 Tina Weber
I think, as we've seen in this short discussion, labour shortages is a very complex topic. My argument would be that policymakers need to focus on what drives the labour shortage in the particular sector or occupation that they're looking at. The first thing they should see is: is there still slack in their labour markets? Or are there groups that are underutilised, be they women, disabled individuals, migrants, refugees? If you still have potential to activate some groups, maybe this is your first port of call. If the driver is poor working conditions, then this is where you need to target your activity. Be very mindful in different sectors and occupations as to what is really the cause of the shortage and try and hone in on that. OK, that might mean a complex policy mix generally, but it's a targeted approach then.

00:28:28 Mary McCaughey
So, a deep dive into the drivers at play and then a segmentation customisation of the response on that basis. OK, thank you. Gijs.
                
00:28:36 Gijs van Houten
Yes, I'd bring it back to the company floor, which of course is what I've been talking about most. I would say focusing on employee involvement is key. It's not just about managers knowing better how to get the most out of people. People can tell you what they need in order to do their job, and they need to have an environment that is safe and motivating to do so. Arguably, that also requires a healthy social dialogue system. If you have a well-functioning social dialogue system where trade unions and employers can arrange the broader package of working conditions, then on the work floor itself, there is room and trust that allows managers and employees to speak about the issues to hand in terms of actually doing the best job for the business. Rather than having to focus all the time on who gets how much of the pie, you create an environment where everybody wants to focus on how to get a bigger pie altogether. Involving employees directly in these workplace discussions on how to improve work, and indirectly through social dialogue, I think, are key in order to achieve this more people-centred management approach that we've been talking about.
                
00:30:03 Mary McCaughey
That's very important, what you raise there, clearly the employee involvement, but also that whole idea of creating a context where psychological security exists for the employee and that there is trust within the organisation. Without that, you're not going to move very far forward on anything, let alone on this particular issue. I think we've covered all the bases in terms of your three points. I mean, we're looking at the drivers, which clearly are the big picture, and then going into more granular detail on how to address them. We're looking at the managerial capacity and maybe the gaps that need to be addressed there, and we're looking at employee involvement. I think, were we to come away from our policymaker meeting, certainly we would have covered all the bases. 

Thank you very much for that. Thank you for a really interesting, if rapid, tour around the skills area in this European Year of Skills. Thank you, Tina, thank you, Gijs, and thank you, Giovanni in Thessalonica. Please do join us again for our next podcast, which will be upcoming. And for any of the other issues that we discussed today, for example, gender equality, work/job quality, working conditions and indeed so much more, you can download everything from our website or you can log on to Spotify or your favourite podcast platform. So, until the next time, when Eurofound talks to you.

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