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

Omar Arias's picture

Some Skills should Come Before Jobs, Others Develop with the Job
Students work on an engine at Sisli Vocational High School 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.


Submitted by John Faosheke on

This is a fine article that can benefit some countries in West Africa, especially a country with much population but lack equally populated literates in some regions due to religion inclination.This problems gives the country of egalitarian distribution of skills and competent for jobs with denial of right of opportunity to those educated part of the country. Hence, it has brought social and political upheaval to that country. It is a good article to learn from.

Submitted by omar on

thanks, John. For your interest, I agree this issue applies more generally to many countries, including in East Africa.

Submitted by Laura Shemeza on

Thank you for such interesting subject. I strongly believe that the education system shall not be a stand alone system but align its priorities along with those of the labor market (especially the private sector). For that to effectively work, it means national government policies and regulations are designed to facilitate transition from training to work. In sum, strong public-private partnership is required to see successful implementation of youth employment policies.

Submitted by David on

Wolfgang and Omar’s recent blog posts have a familiar ring. Several weeks ago, Shanta gave a talk at Wellesley College, where I teach, and this issue came up, not with reference to the Balkans but as a general issue in reducing poverty.

Is poverty more the result of supply or demand-side constraints? If one had to choose between improving the quality of schooling or, say, breaking down the road monopoly where would one want to put one’s political capital? In Poor Economics, Banerjee and Duflo refer to this as the demand vs. supply wallahs, a useful metaphor.

I became a demand wallah many years ago. I recall a conversation with a colleague, asking him if he could do one thing to reduce poverty what would it be? “Roads, roads, and roads” he answered. Nothing, in his mind, was more important than reducing the constraints on farmers from getting goods and inputs to and from markets.

My priors on human capital as a constraint also stem from my understanding of our favorite East Asian cases. Do any of these growth “miracles” suggest that one needs to reach a critical minimum threshold of education as a prerequisite for subsequent rapid growth and poverty reduction? Do any growth regressions suggest this? Does one need a formal education for an agricultural revolution or for low-end manufacturing to take-off? How much human capital did all those young women in the garment, running shoe and basic consumer electronic assembly plants need? Is today’s world any different?

I also am dismayed by selling schooling as a panacea whether for reducing poverty in poor nations, lowering unemployment in Serbia, or to decreasing wage inequality in the US. In a bad environment, human capital can be as easily wasted as physical capital. If demand for skills is limited, supplying more of them may not be especially beneficial.

But whether one is a demand or a supply wallah, both sides can agree on the terrible waste that spending money on schooling represents when kids don’t learn anything or learn very little. This is a corruption tax plain and simple with the worst incidence. One only gets one shot at educating a child – once s/he reaches, say, 10 or 15 the chances of educating her/him are that much more difficult and expensive. The costs of wasting the opportunity in the early years have lifetime consequences for the individual and for the macroeconomy. And good schooling is like vaccinations, no one can take it away from you and it provides benefits that last a lifetime.

Submitted by omar on

And great questions on whether minimum thresholds of human capital are needed to spark growth/job creation. Many endogeneous growth models how that this can indeed be the case. I doubt, though, that these are identifiable empirically with available data (small and short cross-country panels, for which one is able to use PISA scores to proxy for skills rather than the rather imperfect education levels).

Submitted by omar on

Thank you for your comments, David. I think there is agreement that in a business environment that is not conducive to investment, entrepreneurship and business expansion (interalia, economic growth), it is hard for skills investments to pay off as there will be little job creation. however, as argued in my last blog, I think the supply vs. demand question is a false dichotomy. They are both endogeneous, ie, at a macro level jobs and skills are jointly determined for several reasons, including externalities and coordination failures.
Because of the path-dependency of skills development, I do beleive that investments in children's and youth foundational skills can not be delayed until a country has tackled other investment climate constraints. I'd actually treat them a la par with investments in infrastructure and institutional (rule of law) reforms, whose pay off also take time to materialize.

Submitted by Ergis Sefa on

Great article dr. Omar.

The skill development issue is haunting us in WB countries. For Albania, where I speak from, employers are tightening their expenses by dumping pressure on their workforce, cutting it down and increasing the load to the remaining ones. It is difficult to think that skill enhancement, under these circumstances, would pay off to a short-to-medium term.

Undoubtly, the foundational skills are necessary to build more "sophisticated" ones. Yet, what to do about those people who have passed that phase and are now in their 20s and 30s, wanting to enter the labor market. They require mostly a "quick fix" to get them into a job as soon as possible. How to solve such dilemma?

Submitted by omar on

Thank you for your comment, Ergis. I repeat here my observations in the WEF site for the benefit of those following the exchange in Future Development.

Indeed, in a business environment that is not conducive to investment, entrepreneurship and business expansion, it is hard for skills investments to pay off as there will be little job creation.

This is why in a recent report by the Bank for Europe and Central Asia ("Back to Work") we argue that policy makers need to push the necessary economic and institutional reforms and policies to foster private-led job creation, while at the same time investing smartly in the foundational skills of children and youth -tomorrow's workers whom will likely benefit the most from a more vibrant economy. And having proper mechanisms to guide tertiary education investments and student decisions with information about labor market prospects of different careers/fields of study.

For those already in the workforce (youth and older workers), it is even more imperative to align skills investments (especially labor market training) with the current and prospective labor market needs while pushing the institutional and economic environment conducive to job creation. Technical/vocational training, even when it can be indeed be a "quick fix", is likely to result in a waste of resources if it is not aligned with labor market needs. Much of this training can and should happen on-the-job, with employer's provision, or through mechanisms to coordinate public and private investments (as done in some East Asian countries).

A final note - training has to be age-sensitive. Older brains learn differently than younger brains, e.g, for good or for bad, as we age we acquire skills by building on prior knowledge, practice, and experience (even if irrelevant!). This is a point mixed too often in the design of training.

Thanks again for your interest.

Submitted by Ergis Sefa on

In continuation...

Here in Albania the gov is focusing primarily on VET as a panacea for our mismatch between demand/supply in the labor market. The focus is primarily in secondary VET, in a country (and region) where tertiary education is a strong psycho-cultural norm. Alas, you have 97% of VET graduates that continue their education in universities and don't focus on entering the labor market.

Age-sensitive training means that you have to analyze the strata of society and build training modules and curricula based on their experiences, whatever they got as experience. That's something not happening here.

Meanwhile, we are rushing to introduce the German-type "dual system" that does foster on-job training but with businesses not willing to pay students and requesting the government to cover their cost for this training period for extended periods, up to two years (!!!). Isn't that extortion?

Anyway, thank you for your insights.


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