How to Break the Curse of Unemployment: Jobs First or Skills First?

The World Bank


Originally posted on the World Bank Blog, November 18, 2014.

To be clear from the onset: I will not oversimplify the unemployment (or inactivity) problem in the Western Balkan countries as solely due to a lack of skills in the population. Low employment rates result from both insufficient creation of jobs by enterprises and too-high a fraction of the workforce that is ill-equipped to take on the jobs that a modern economy creates. Both issues are intertwined. Solutions, therefore, require efforts on several fronts to enable a more vibrant private sector –including improvements in the business environment, enterprise restructuring, integration in global markets and promoting entrepreneurship— as well as to prepare workers for new job opportunities.

As part of these solutions, some skills need to come before jobs. All youth need to acquire a solid foundation of cognitive (e.g., basic literacy and numeracy) and socio-emotional skills (e.g., discipline, persistence, teamwork) before entering the labor market. These foundational skills are best developed from pre-school through high school education. They are a pre-requisite for learning-readiness and trainability of prospective workers since they enable the acquisition of technical and job-specific skills through tertiary schooling, training, and on-the-job experience. The evidence strongly suggests that these skills are essential for the inevitable job transitions of a fast-changing labor market, constantly disrupted by technology and international competition.  If youth fail to acquire these skills, they will face an entire work life with serious deficits that are hard to remedy.

While some of these socio-emotional skills can be developed on the job, firms are less likely to train on these foundational skills since there is a higher risk the investment is captured by other employers. But even if they're willing, employers often find it hard to train workers who lack a minimum foundation of literacy and dependability skills. They will often say: "How can you train someone who cannot read and follow basic instructions?, who is not going to show up on time, or persevere to finish and benefit from the training?".

How do Western Balkan countries do in producing these foundational skills?. While the countries generally do well in producing high-school graduates, they do badly in what truly matters: equipping them with the right foundational skills. In Serbia, about forty percent of 15-year olds who took the most recent PISA tests were rated as lacking minimum numeracy skills, and about one-third were rated functionally illiterate in reading. In Albania and Montenegro, about half of 15-year olds scored as functionally illiterate. The former Yugoslav Republic of Macedonia has not participated in these tests since 2000, but at a time its students did very poorly. Not surprisingly, employers in the Balkans, as in other emerging economies, underscore the lack of these foundational skills as a problem to firms’ hiring. For instance, in a survey in FYR Macedonia, about one-third of employers report that young workers lack these basic literacy as well as socio-emotional skills.

For these countries, this can mean an entire cohort of hard-to-employ individuals, firms that struggle to find the skills they need to thrive, and policy makers struggling to attract new businesses and high-value added investments. Avoiding this, requires reforms of the education system to move from the rote learning that predominates in basic education in much of the region to a focus on development of the foundational skills that matter for employability and the economy. One specific area that ​warrant policy reform is postponing early tracking into TVE schools to allow youth to acquire strong foundational skills. Some educational systems are still tracking students too early into vocational streams, possibly at the expense of generic skills. This is a vestige of the legacy of centrally planned economies.

Provided workers acquire strong foundational skills, they can subsequently acquire technical and job-specific skills in post-secondary education and on the job. These skills need to be developed a la par with labor market current and future needs. More than ever, workers are matched to jobs based on their actual technical skills, not just their diplomas. Without strong linkages with employers and labor market needs, postsecondary education and training end up producing too many graduates in the “wrong” careers. Too many youth go into saturated or dead-end professions and when they land a job they are likely to end up in jobs unrelated to their acquired qualifications. When tertiary institutions and training programs devise their program offering and students choose careers without a clear grounding on labor market prospects, everyone is acting on the dark.

Moreover, since there is a lag in the response of the supply of tertiary graduates to the labor market demand for skills, countries face a real risk of coordination failures: private firms refrain from investments in high-potential sectors due to the lack of workers with the right skills, and at the same time workers do not invest in these skills due to the lack of jobs. That is, inadequate skills and insufficient jobs can lead to a vicious circle of high unemployment and insufficient job-creating investment.

How do Western Balkan countries do in producing tertiary graduates aligned with labor market needs?. First of all, it should be noted that on average, tertiary education is a valued investment for most youth. College-educated workers have an average earnings advantage of 60 percent over workers with a secondary education in countries like Albania and FYR Macedonia. And this average college earnings premium remained strong over the 2000s decade while the supply of graduates expanded.

However, averages are deceiving. It is common to hear anecdotal evidence throughout the region that not all individuals benefit the same way from a college education. In fact, studies in other Eastern European countries like Bulgaria and Poland show that the high average return to tertiary education is not available to everyone alike—in particular, students going to fields with low labor demand accrue returns that are significantly lower or even negative. A reason is that in much of Eastern Europe, the rapid expansion of the supply of tertiary education took place with nonexistent or weak mechanisms of quality assurance and loose ties to the labor market.

Addressing this, requires mechanisms to forge closer links between education and training providers with employers and efforts to coordinate skills development with the types of investments (domestic and foreign) and job creation a country is pursuing or anticipating, as seen in the experience of countries like Costa Rica, India, South Korea, and the U.K. Important also is to establish reliable mechanisms  to communicate regular information about what jobs graduates are finding, the most demanded skills, and the returns of tertiary education programs to help students make better choices about which field of study to pursue.

Summing up, smart skills development is an important part of the puzzle to address the complexity of the jobs challenge in the Balkans. This involves reforms and investments to equip prospective workers with the strong foundational skills that are a pre-requisite to jobs, as well as to align post-secondary technical and job-specific skills development with the jobs of today and tomorrow. The result can be a virtuous circle where skills development goes along with labor market needs, and a properly skilled workforce attracts the right investments that can create more and better jobs.