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«SKILLS MISMATCH IN LATVIAN MANUFACTURING SECTOR Authors: Ilze Zumente and Kārlis Putriņš ISSN 1691-4643 ISBN 978-9984-842-28-8 November 2011 Riga ...»

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SSE Riga Student Research Papers

2011: 7 (136)

SKILLS MISMATCH IN LATVIAN MANUFACTURING SECTOR

Authors: Ilze Zumente and Kārlis Putriņš

ISSN 1691-4643

ISBN 978-9984-842-28-8

November 2011

Riga

Ilze Zumente and Kārlis Putriņš 2

Skills Mismatch in Latvian Manufacturing Sector

Ilze Zumente

and

Kārlis Putriņš

Supervisor: Oļegs Tkačevs

May 2011

Riga

Ilze Zumente and Kārlis Putriņš 3 SSE Riga Student Research Papers 2011: 7 (136) Skills Mismatch in Latvian manufacturing sector Ilze Zumente and Kārlis Putriņš Abstract Following the economic downturn starting in 2008, the unemployment rate in Latvian labor market has reached unexpected and hazardous peaks. Although theoretically all the workplaces should be taken, the number of vacancies continues to grow. An explanation of the phenomenon is skills mismatch, which refers to a situation when the skills demanded by employers differ from the skills supplied by employees. This research aims at determining the skills that deviate from the labor market equilibrium in Latvian manufacturing sector. By using surveys distributed to 201 employees working in 30 manufacturing companies operating in Latvia and methodology developed by Allen and van der Velden, it is found that only 24% of the workers in the manufacturing sector have adequate skill sets for their jobs. Such skills as responsibility, technical knowledge and problem solving abilities are underprovided, while Russian language skills and time planning are overprovided by the manufacturing workers. OLS regression suggests that skills mismatch results in wage penalty. Having wrong skills decreases wage rate by 17 %, skill shortage - by 21% and skill surplus - by 25% as compared to matching skills.

Current strategies employed by Latvian Government should lessen the skills mismatch, if the required funding is found and reforms implemented.

Keywords: Skills mismatch, wage penalty, manufacturing sector Ilze Zumente and Kārlis Putriņš 4 Acknowledgments Authors express their dearest gratitude to the bachelor thesis supervisor Oļegs Tkačevs as well as Zane Cunska for suggestions during the thesis writing process. Authors also would like to thank their families for the support and opposition team for suggestions in order to improve the thesis.

Ilze Zumente and Kārlis Putriņš 5 Table of Contents Introduction

Literature Review

Causes of the skills mismatch

Educational mismatch

Skills mismatch impact on wages

Skills mismatch in the manufacturing sector

Methodology

Questionnaire

Regression analysis

Strategy evaluation

Results

Data

Skills mismatch type

Specific skill dispersion

Regression analysis

Latvian Government strategies

Concept

Europe 2020

Evaluation

Conclusion

Works Cited

Appendices

Appendix 1 Employees questionnaire

Appendix 2 Employers questionnaire

Appendix 3 Lower level occupations in manufacturing sector

Appendix 4 Sample distribution

Appendix 5 Sample normality testing

Appendix 6 Regression results

Appendix 7 Descriptive statistics

Appendix 8 Variable description

Appendix 9 T-tests for skills mean difference testing

Ilze Zumente and Kārlis Putriņš 6

Introduction

The unemployment rate at the end of 2010 reached 16.7%. More than 193 thousand citizens found themselves without a job. At the mean time, the number of vacancies continued to increase reaching one of the highest levels registered during the last 18 months (CSB Latvia, 2011). Although theoretically the number of vacancies and unemployment rate should be negatively correlated, in the current situation the trend has been inversed, suggesting that the workers seeking jobs do not match the skill profile demanded by employers. The phenomenon is known as skills mismatch. As argued by the Bank of Latvia “the persistence of skills mismatch risk in the labor market, if unresolved, could turn into serious problem for future growth of the Latvian economy” (Bank of Latvia, 2010).

A growing body in the existing academic literature argues that skills mismatch may be one of the most important factors determining the high rates of unemployment especially in the times of economic downturn. Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis has argued that “most” of America’s unemployment can be explained by skills mismatch (Kocherlakota, 2010). The view is supported by various academics like Hamm (2000), and institutions as European Center for the development of Vocational training (CEDEFOP, 2009) (Hamm, 2000). Furthermore the issue is currently being discussed not only in countries experiencing decline in growth rates- also Poland, which was the only EU country that experienced growth during the financial crisis, sees skills mismatch as the possible threat to the future growth (Bloomberg, 2011) CEDEFOP, which has specialized in studying the skills mismatch problem, has differentiated between various types of skills mismatches. In general skills mismatch refers to a situation when employees skill set does not correspond to the skills needed in order to complete the job he is doing (Lundberg, 2007). Additionally, various specific forms of mismatch are identified including ones like overeducation, undereducation, overskilling, underskilling etc.





More general way to think about the phenomenon of skills mismatch is in the vertical or horizontal type- the vertical mismatch referring to the situation when the level of skills or education is less or more than required, however, horizontal mismatch occurring when level of skills and education matches job requirements yet type of skills or education is inappropriate for the current position (CEDEFOP, 2010). Skills match is present only when the level of skills and Ilze Zumente and Kārlis Putriņš 7 education matches job requirements. Problem of skills mismatch is found widespread and affecting large share of Europeans. In 2008 the Center estimated that only 21% of workers in Europe hold jobs that fully fit their education, training and skills (CEDEFOP, 2010).

Due to work specifics, not all labor market sectors are affected by the problem equally. A sector where skills mismatch displays significant problems is manufacturing. Because of the nature of manufacturing sector, namely frequent introduction of new technologies and work practices, people constantly have to update their skills to keep up to the rising standards (Gros, 2010). As for the moment manufacturing sector is employing approximately 17 % of the Latvian workforce, which points to the importance of the industry (CSB Latvia, 2011). Furthermore, for a small and open economy as is the case of Latvia the manufacturing sector is essential due to its share of exports. According to the Bank of Latvia Macroeconomic Development Report 2010 the manufacturing sector “has become the key driver of the economic recovery” by rising more than 8 % in year 2010 (Bank of Latvia, 2010). This has also been noted by the Latvian Government, which has given the stimulation of exports and competitiveness one of the top priorities in Latvian Stabilization Program (Ministry of Finance, 2009).

Although factors mentioned above suggest the existence of skills mismatch in Latvian manufacturing sector, so far it has not been confirmed or researched in detail. Moreover, it is uncertain in the overall existing literature, whether there is a negative economic effect associated with skills mismatch and how great it is. The purpose of this bachelor thesis therefore is to explore the skills mismatch existing in the manufacturing sector of Latvia and to identify its

economic effect. In order to investigate the issue, authors set their research question as follows:

“Is there a skills mismatch among workers in Latvian manufacturing sector and does it result in a wage penalty?” The research question tries to emphasize the twofold aim of the bachelor paper. Firstly, authors seek to discover the presence of skills mismatch in Latvian manufacturing sector. In order to do so, list of core skills needed for workers in the Latvian manufacturing sector is developed. It is done by undertaking qualitative approach, namely interviews with industry professionals and employers. Following that, questionnaires for both workers and their supervisors are made and distributed to mentioned parties. Companies are chosen in a way to create sample that represents the true proportion of workers per industry in Latvian manufacturing sector. After gathering responses, methodology developed by Allen and van der Ilze Zumente and Kārlis Putriņš 8 Velden (2001) is applied to discover the level of skills mismatch and its types among the population. Concrete levels of supply and demand in core skills are also identified. This allows for clear illustration of level of core skill mastery desired and actually prevailing in labor market.

Secondly, authors aim at estimating the possible negative effect from having skills mismatch. For this purpose ordinary least square (OLS) regression is employed. By including 200 observations regression allows to determine whether skills mismatch results in wage penalties for the affected workers suffering from skill surplus, skill shortage or wrong skills.

Additionally, in order to explore how skills mismatch issues are addressed by Latvian Government, summary of two major strategies- Concept and Europe 2020 currently in progress is presented. Theoretical aims, practical solutions and funding issues of strategies are discussed.

In order to allow for more explanatory and concrete results the focus is put on lower level employees in the manufacturing companies. We define lower level occupations by including 4 levels of occupations according to Eurostat classification, more specifically: ISCO6- skilled agricultural and fishery workers, ISCO7- craft and related trades workers, ISCO8- plant and machine operators and assemblers and ISCO9- elementary occupations (Eurostat database, 2011).

The rest of paper proceeds as follows. Section 2 reviews the existing literature on the subject. Section 3 explains the methodological approach, while section 4 presents the results and analysis. Section 5 introduces the actions undertaken by the Government of Latvia and provides an evaluation. Section 6 concludes.

Ilze Zumente and Kārlis Putriņš 9

Literature Review

The literature in the field of skills mismatch is rather inconsistent due to lack of concrete definitions and unified methodological approach to the issue (CEDEFOP, 2009). As the concept of skills mismatch has an impact not only on the organizational level of companies, but also on higher complicated macroeconomic policies, the academics of the field usually are able to explore the phenomenon only partly or to a limited level. The situation has resulted in a lack of comprehensive understanding. The existing work and research relevant to the bachelor thesis tends to divide the findings into following main subtopics and categories.

Causes of the skills mismatch A plausible explanation for the skills gap in the labor market is the increase in the job skills requirements that sometimes tend to grow at a higher speed than people are able to adjust.

The view is supported by Michael J. Handel, who based on a panel data for the U.S. conclude that job skill requirements have grown over time in the period from 1970 to 1990 (Handel, 2000). Author’s view is consistent with the hypothesis developed by Spenner (1979) suggesting that job requirements tend to grow over decades, although only at a moderate rate (Spenner, 1979). Also Katz and Murphy examining the period in the late 20th century based on the simple supply and demand framework conclude that skills demand has increased more dramatically than the skills supply (Kratz & Murphy, 1991).

A concentration on separate social groups is also present in the existing literature. The job skill requirement gap is further developed by McIntosh and Steedman (2000), who concentrate their research of job skill requirement on the low-skill workers and find out that employers demand higher communication and social skills of workers which many of them are still lacking (McIntosh & Steedman, 2000). Handel (2000), on contrary, pays the most attention to the technical skill requirement, which has exceeded the growth in the actual skills leading to increased demand for highly-skilled workers in comparison to low-skill workers. His empirical work finds little shortage of technical or computer skills leading to the idea that current policies used to close the gap may be incorrect (Handel, 2000).

Another cause of the mismatch in the educational and skill level is the so called “Assignment theory”, which determines an optimum when workers are allocated in the organization from the top to down according to their skills. As there are not equal distribution of Ilze Zumente and Kārlis Putriņš 10 complex and easily doable jobs in the labor market, mismatch is likely to occur (Allen & van der Velden, 2001) Educational mismatch A separate literature section concentrates on the mismatch caused by inappropriate amount of education for a concrete job in the labor market. Over- and under-education has been widely explored due to the relatively easier accessible data and more concrete measures in comparison to the mismatch in concrete skills.

The increase in the amount of university graduates in the latest decades has triggered a new branch of research mostly in the field of overeducation. Green et al (1999) have contributed to the educational mismatch area by providing new methodological approach and concrete definitions. Empirically they find that according to the survey done by the graduates of University of Newcastle (UK) approximately 20 % of employees in the UK labor market have higher education than required by their position (Green, McIntosh, & Vignoles, 1999). A supporting paper by Dolton and Silles (2002) examine the question whether educational investments are later beneficial in the labor market and also conclude an approximate 20 % overeducation rate (Dolton & Silles, 2002). Chevalier and Lindley report a rate of 35 % in year 2007 (Chevalier & Lindley, 2007), while Vaisey mention similar effects in the U.S. for the period from 1972- 2002 (Vaisey, 2003).



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