Skill gaps in the workplace: measurement, determinants and impacts

• Author: Seamus McGuinness,Luis Ortiz
• Date: 01 May 2016
• Published date: 01 May 2016
• DOI: http://doi.org/10.1111/irj.12136

Skill gaps in the workplace: measurement,

determinants and impacts

Seamus McGuinness and Luis Ortiz

ABSTRACT

Optimal training decisions require employers to have accurate information about

their workers’training needs. However, little is known with regard to the key factors

determining the accurate transmission of worker training requirements. Using one of

the few linked employer–employee surveys in the world, the 2006 Irish National

Employment Survey, this article identifies the key factors determining the correct

identification of skill gaps within firms. The impact of skill gaps on average training

expenditures and labour costs is also measured. The research finds that both HRM

and collective bargaining arrangements are important factors in facilitating the

accurate identification of skill gaps within firms. The analysis confirms that skill gaps

are a key determinant of training expenditures and tend to raise average labour costs.

Finally, the evidence suggests that employee perceptions of skill gaps may be prone to

higher levels of subjective bias relative to those based on the employers’views.

1 INTRODUCTION

There is now a considerable literature on the issue of skill mismatches (refer to

CEDEFOP, 2010 for a summary) with the majority of studies demonstrating that

an inadequate alignment between the human capital of workers and firm-level

requirements is costly on a number of fronts, including workers’earnings, job

satisfaction, job turnover, training participation and productivity (McGuinness,

2006; Verhaerst and Omey, 2006; McGuinness and Wooden, 2010; Kampelmann

and Rycx, 2012; Quintini, 2011; Mavromaras et al., 2013). However, to date, the mis-

match literature has focussed almost exclusively on the impacts of overeducation and

overskilling at the individual level, and has largely ignored the impacts of skill gaps at

the firm level. Moreover, the mismatch literature has focussed on the costs associated

with surplus levels of education and skills, which are likely to be of less significance

for firms than deficits in workers’human capital.

Skill gaps describe the phenomenon, whereby the skill levels of workers are insuffi-

cient to meet the requirements of their current job. The lack of research in this area is

particularly surprising given that skill gaps represent a primary motivating factor in

the training investment decisions of both firms and workers. Skill gaps have the

potential to harm firm-level productivity as average worker productivity is likely to

❒Seamus McGuinness is a research professor and the programme coordinator for labour market research

at the Economic and Social Research Institute. Correspondence should be addressed to Seamus

McGuinness, Economic and Social Research Institute, Whitaker Square, Sir John Rogerson’s Quay,

Dublin, Ireland; email: seamus.mcguinness@esri.ie

Industrial Relations Journal 47:3, 253–278

ISSN 0019-8692

© 2016 John Wiley & Sons Ltd

be lower in the presence of substantial skill gaps; skill gaps will also tend to inflate

average labour costs as organisations require more workers per unit of output.

Finally, firm-level profitability will be adversely impacted by skill gaps as a conse-

quence of the additional training and recruitment investments that arise as a direct

consequence of skill gaps.

The article seeksto address the current gaps inthe literature and has two central aims:

1. To assess the determinants and relationship between skill gaps measured from

the perspective of both employers and employees in order to draw conclusions

regarding the main drivers of the accurate recognition of training requirements

within firms. If there are channels or institutions facilitating the communica-

tion of those skill deficits between management, on the one hand, and workers

or their representatives, on the other hand, these skill gaps should be more eas-

ily recognised, diagnosed and tackled than in firms where these mechanisms do

not exist.

2. To determine the degree to which skill gaps affect training expenditures and

firm-level performance.

The article is structured as follows: section2 reviews the literature, section 3 describes

the data and methodsused in the study, section 4 outlinesthe central results arising from

the analysis and section 5 provides conclusions and policy recommendations.

2 REVIEW OF THE LITERATURE

Skill mismatch is defined as the excess or deficit of qualifications or skills possessed by

individuals, relative to the skills required by the job they hold (CEDEFOP, 2012).

The literature has focussed on the effects of overskilling and overeducation at the

worker’s level (Duncan and Hoffman, 1981; Allen and van de Velden, 2001). But

relatively little is known about the impacts of under-skilling or under-education on

individual outcome variables such as job satisfaction and earnings, and even less is

known about their aggregate effect on firm-level performance.

A limited number of studies do address the issue of skill gaps on firm-level perfor-

mance. Using data from the UK national employment survey (2003), Tether et al.

(2005) reported that over one fifth of the sampled firms believed that skill gaps delayed

the introduction of new products, with a third also stating that such gaps represented a

barrier to introducingnew work practices. A series of Northern Ireland sectoral studies

(NIERC, 2000, 2001, 2002; Erini, 2005), also reported descriptive evidence that skill

gaps substantially ham pered firm-level performance as a result of subsequent lower

productivity, a failure to meet deadlines and lower product quality. Finally, Forth

and Mason (2004)report that ICT skill gaps negatively impacted company sales perfor-

mance within a sample of UK firms employing ICT professionals. Nevertheless, given

the potential importance of skill gaps for both firm-level performance and training

decisions, this research is surprisingly limited and largely descriptive.

Not much effort has beenmade in quantifying the importance of thephenomenon or

identifying its determinants at the firm level, although some research has demonstrated

the importance of the sector or the product market strategy of the company. Thus, a

recent report of the UK Commission for Employment and Skills found that ‘high-end

product strategy establishments are, on average, more likely than other establishments

to report both skill-shortage vacancies and skills updating needs’(UKCES, 2011: 42).

In the same line, Haskel and Martin (2001) holds that technical progress may create

254 Seamus McGuinness and Luis Ortiz

© 2016 John Wiley & Sons Ltd