Changing Skills Demand in the Workplace: Global and Regional Perspectives

1. Changing Skills Demand in the Workplace: Global and Regional Perspectives Hong Tan Lead Economist, WBI Seminar Growth Strategies for Secondary Education in Asia September 19-21, 2005 Kuala Lumpur, Malaysia

2. 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

3. 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)

4. There has been a shift from agriculture to employment in industry and services … Service sector employment – 1960s to 1990s Early 1960’s 1980 Late 1990s

5. And restructuring that often tends to increase job turnover…making jobs and job security more volatile Job creation and destruction

6. Rising relative returns to higher education in many OECD countries… College Wage premiums risen in US in the past 2 decades College Plus/High School Wage Premium 1967-1997 Source: Murphy & Welch, Relative Wages in the 1990s, unpublished

7. As well as some developing countries For example, Brazil and Mexico Similar 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” BRAZIL Source: Blom, Holm-Nielsen, and Verner, “Education, Earnings and Inequality in Brazil: 1982-1998” World Bank (2001)

8. 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)

9. Skilled jobs have grown faster than less skilled jobs despite higher pay E

10. 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)

11. 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

12. Same Forces Operating for Post-School Training of Workers • 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?

13. 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

14. Incidence of In-Firm Training Variesacross regions and countries Source: Investment Climate Surveys in 20 countries (early 2000s)

15. Within countries, incidence of training varies across firms by technology level Source: World Bank Investment Climate Surveys

16. Malaysia: Training Associated with Recent Introduction of New Technology % increasing training investments 70 70 60 60 50 50 40 40 30 30 20 20 10 10 0 0 Micro Small Medium Large Micro Small Medium Large increased training in last 3 years new technology in last 3 years no new technology in last 3 years

17. And productivity impact of training is greater with new technology Productivity Effects of Training -- Taiwan 1986 % High-Tech Firms 100 Low-Tech Firms 80 60 40 20 0 Textile Apparel Paper Transport Plastics Chemicals Electronics Source: Tan, Aw and Batra (1995)

18. ICT Changing Work Organization and Demand for Education and Skills • 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 organizations • increased screening of new hires, use of educated labor, in-service training, and use of quality control methods • firm performance and competitiveness

19. ICT, Skills, and Firm Performance Example of Malaysian Manufacturing 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 ICT • Learning gains from ICT adoption larger for training firms than for non-training firms – after 4 years, 31% gain versus 14% gain

20. Summary Skills Demanded in the Workplace • 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

21. Summary and Implications for Education and Training - 1 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

22. Summary and Implications for Education and Training - 2 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

23. Summary and Implications for Education and Training - 3 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