Is there really a skill shortage?

The skill shortage is a big deal. Businesses are reporting having difficulties in recruiting employees with the relevant skills. And it could lead to a potential $8.5 trillion loss in potential annual revenue by 2030. 

But what if it isn’t the skills that are missing, but the most effective strategy for finding candidates that possess them?

To answer that requires a detailed analysis of why people think there is a skill shortage. By looking at the root causes and contributors, and the data, we will be able to determine whether or not it is as significant as the general consensus suggests.

We will also look at a recruiting strategy that’s gaining popularity among businesses: skills-based hiring. The results of which, when compared to typical recruitment processes, seem to show that there are more than enough qualified workers out there to meet demand.

Shortage of skills – what the data tells us

In the UK, the Federation of Small Businesses stated that in August 2022, 80% of small firms had faced difficulties in finding applicants with the necessary skills in the previous 12 months.

And in November 2022, 13.3% of businesses surveyed by the ONS reported experiencing a shortage of workers. This figure had remained fairly consistent for the previous 12 months, and it’s likely to continue deep into 2023.

Skill shortage is often reported as a separate issue to the shortage of workers. However, they are essentially one and the same. By saying there aren’t enough workers to fill jobs, employers and recruiters are basically saying there aren’t enough active job seekers with the desired set of skills. This is evident in the number of job vacancies.

However, an initial look at the numbers tells a different story. Between September and November last year, there were 1.19 million vacancies in the UK. And that was roughly the same number of unemployed people during that period.

Now we’re aware that this is a simplistic measure of whether or not there is a skill shortage. And it omits crucial details. The odds of those unemployed people possessing the exact skills required to fill those vacancies, for example, are slim.

Another important caveat is what industries those vacancies lie in. If there is a tranche of vacancies in hospitality and retail, for example, then it is unlikely to be filled by a group of unemployed people whose expertise is in health and social care. Although they will possess many of the transferrable skills.

But the truth is, more people are looking for work than there are vacancies. And the evidence of this can be found in the reasons that are given for the skill shortage. 

Why is there are shortage of skills?

Labour supply and demand since the pandemic

Since the pandemic, the demand for labour has recovered faster than the supply. The Bank of England’s August 2022 Monetary Policy Report supports this. It shows that the number of people in employment and the number of vacancies, i.e., labour demand, is above pre-pandemic levels. Labour supply, however, is shown to be below pre-pandemic levels.

At first glance, these figures contradict our earlier assessment that there’s a match between the number of vacancies and the number of unemployed people. But there’s more to it.

The reason for the perception that demand is outstripping supply is the increase in economic inactivity among working-age people since the pandemic. 

Economically inactive people are not included in the unemployment figures because they are not actively looking for work. These are people that were likely in employment at the start of the pandemic but are now either caring, sick or they’ve taken early retirement. According to an article from the BBC, there are around 10 million people of working age that fall into this category.

However, if you discount those studying, caring, sick or retired, there are still around 1.7 million people who want to work. In short, demand isn’t outstripping supply – supply is nearly 50% greater than demand.

So does that mean there’s no skill shortage?

Not quite. But there is certainly a difference between the perceived scale of the shortage of skills and the reality.

For example, a lot of the data from the ONS and the Bank of England is more concerned with the sheer number of economically inactive people. So the overall way it’s presented inadvertently exaggerates the true scale of the problem. Many employers and recruiters are simply too busy to analyse the figures in the granular detail that we have. So they are more likely to take it at face value.

But in addition to that, the experience on the ground does suggest that skilled workers are in short supply. An oft-reported stat from LinkedIn’s Top 100 Hiring Statistic 2022 shows that 63% of recruiters see talent shortage as their biggest problem. It also came out as the top challenge to recruiters in Bullhorn’s Staffing and Recruitment Trends Survey.

Skill requirements for jobs are changing

The reality is, jobs are changing. According to this data from LinkedIn, the skill sets for jobs have changed by around 25% since 2015. And with an increased reliance on automation and strategies like workforce pixelation, that number is expected to double by 2027.

As a result of these ever-shifting requirements, you can see why skill gaps might open up. But our analysis suggests that it isn’t as pervasive as many might think. In fact, it isn’t so much a problem created by job seekers lacking the required skills, but by employers’ focus on how those skills were obtained.

Degree inflation

This is evident in employers requiring degrees for jobs that previously didn’t need them – a practice known as degree inflation. This became especially widespread in the decade leading up to the Great Recession. But it’s still an issue today.

Research shows that degree inflation makes the labour market less efficient, and it prevents businesses from finding the talent they need. In other words, degree inflation creates the perception that there’s a significant skill shortage when in reality the shortage is negligible.

Many employers and recruiters have become acutely aware that arbitrary requirements like degrees are creating the sense that there’s a skill shortage. And many are altering their strategies to help them tap into the huge pool of skilled workers that typical hiring processes have missed.

Skills-based hiring vs. typical processes

So we know the typical recruitment process is focussed on assessing levels of experience and academic achievement. But skills-based hiring just wants to know that candidates have the skills to do the job – whether or not they were acquired in an academic setting or elsewhere is irrelevant.

How this approach tackles the skill shortage

The data from LinkedIn shows that employers who adopt a skills-first approach are 60% more likely to find a successful hire compared with those that use a traditional approach.

Data from Applied shows that employers using the skills-first strategy see a 400% increase in diversity, a 300% increase in their number of suitable candidates, a 66% reduction in their overall time to hire, and a 93% retention rate.

In the context of a skill shortage, the 300% increase in suitable candidates is the most significant figure. And it’s no coincidence that during a time when there’s a perceived shortage of skills, companies like IBM are dispensing with degree requirements in favour of a skills-oriented approach.

They know the skills are out there, it’s just a question of using the right tools to find them.

Skills are a better predictor of success

Not only are you more likely to find skills matches by using a skills-first approach, but you’re also more likely to find top performers.

According to “Validity and utility of alternative predictors of job performance”, a paper from the American Psychological Association, hiring for skills is five times more predictive of job performance than hiring for education and more than two times more predictive than hiring for work experience.

The picture is even more definitive when we look at it in more granular detail. A paper by Schmidt & Hunter showed that education was the weakest predictor of performance, next to experience and reference checks.

Conversely, cognitive ability tests, structured interviews and work sample tests – all constituent parts of skills-based hiring – were far stronger indicators of performance.

So to think about those 1.7 working-age adults in the UK that aren’t currently in paid employment, we know that the majority will have valuable skills. We also know they will likely perform well when in a job. The problem is that hiring teams simply aren’t using skills as criteria for finding them. But as we know with companies like IBM, that is changing.

To find out more about how the skills-first approach to hiring is changing the game, check out this article from our founder and CEO Dina Bay.

The bottom line

The skill shortage in the context of changing skill sets for jobs is real. However, the overall scale of the problem is amplified by misleading news stories and industry misconceptions. The inflexibility of typical recruitment processes and degree inflation are also contributing to an overall impression that suggests skills are in short supply.

Once you adopt the skills-first approach and apply it to your hiring strategy, you will increase the depth and diversity of your talent pool. What’s more, you’ll find more successful hires far more quickly. And that’s surely top of the list of priorities for any hiring team.

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