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A lack of opportunities could be an explanation for NI skills gap problem

Economy Watch


Companies need to be encouraged to invest in more skills training for their workers

Companies need to be encouraged to invest in more skills training for their workers

Getty Images/Monkey Business

Companies need to be encouraged to invest in more skills training for their workers

Skills, or the lack of them, has been one of the central economic issues in Northern Ireland for quite some time now.

There have been many conferences, many commissioned reports and many government schemes.

Unfortunately, the headline statistics in Northern Ireland remain bleak to say the least. In 2016, 16% of 16 to 64-year-olds did not have a level 1 National Vocational Qualification (NVQ). To have less than a level 1 NVQ means less than five GCSEs at A-C grade. The equivalent for the UK as a whole was half that at just 8%.

Northern Ireland's productivity is also cited as one of our great economic weaknesses and on this the figures are equally stark.

Productivity measures how efficiently an economy uses its resources to produce output.

More simply, it measures how much output a person in Northern Ireland produces relative to that of our peers.

In 2005 total output per person in Northern Ireland was 80.6% of the UK average. But by 2015, that had fallen to 73.8%.

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Productivity is directly linked to skills. A better qualified and a better trained worker will be able to produce far more with the same resources than an unskilled worker.

Therefore, it is logical enough to draw a line from Northern Ireland's low skills base and our poor productivity.

However, it would be a mistake to focus solely on the level of skills attainment by workers. This is only half of the problem.

There is clearly a problem with the supply of skills in Northern Ireland, but much less attention has been given to the demand for skills.

People gain skills in order to become better at their job or to get a better one.

In most cases people will seek out new skills in the hope that they will be rewarded with higher wages.

Therefore, the supply of skills in the labour market is directly linked to what people perceive the demand for skills to be.

People will seek to gain skills if opportunities for advancement are there, if not why would they bother?

Why aren't the opportunities there? Firms will demand skilled workers and provide these opportunities if they are planning on investing in new technology or research and development. If we want to boost our productivity we need firms to become more innovative and efficient.

But firms that want to move up the value chain will only do so if they feel that the skills that they require for this are available in the labour market.

This is the central conundrum for Northern Ireland. Workers will only boost the supply of skills if they feel there are skilled jobs available for them and firms will only invest and boost the demand for skills if they feel that the available workforce has the necessary skills.

The question naturally beckons: Is Northern Ireland's skills problem an issue of supply or demand?

The short answer is - both. In the Nevin Economic Research Institute Quarterly Economic Observer, launched today, we look at the idea of a Low Skills Equilibrium in Northern Ireland. We argue that Northern Ireland's skills problem is equally due to a lack of supply and a lack of demand.

A low skills equilibrium is a situation where workers do not invest in skills because they do not feel that they will be rewarded with higher wages or better paid jobs.

This in turn means that firms do not have access to a skilled workforce and do not invest in innovation.

Companies can then only offer low-skilled, low-paid jobs. Workers therefore have no incentive to change their original decisions. It is a vicious circle.

In order to break out of this skills trap, policy must be focused equally on boosting both supply and demand.

It is no use launching another programme of upskilling, incentivising people to gain skills that will ultimately get them no further in their career progression. Likewise, it is no use lecturing firms about the need to scale up and invest if the economy here cannot provide the skilled workforce such an effort requires.

The solution to a low skills equilibrium is coordination.

We need a mechanism whereby the firms are incentivised toward investment in innovation and where workers are incentivised toward investment in skills. Both of these actions need to happen in tandem.

The UK economy does not do coordination well. Decades of deregulation mean that we don't have the institutional levers to affect this kind of change in the labour market.

It probably goes much of the way to explaining how we ended up here too. Breaking out of this vicious cycle of low productivity and low skills will therefore require a departure from current economic policy.

It can start small, focusing on one industry and a few firms, but we need to find a framework whereby firms and workers embark on investment together. If this can be spread throughout the economy we may go some way to freeing ourselves from this unhappy equilibrium.