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Why Jobs Need to Come Before Skills

Wolfgang Fengler's picture

The Western Balkans Case

When I travel to the Balkans for work, the journey typically begins with a cab ride to the airport from my home in Vienna. The taxi company I use is run and operated by Serbs living in Austria. It’s a great company: very reliable, clean cars and friendly drivers who are always keen to discuss the politics and economics of the Balkans. When I arrive in Belgrade, I’m picked up by drivers who have very similar skills to those of their compatriots in Vienna. However, the former have better salaries and opportunities simply because the company they work for operates in an environment that is much more conducive to nurturing and growing a business. In Austria, unlike in Serbia, a company can operate efficiently, is subject to a relatively fair tax treatment and knows the industry standards it needs to comply with. In turn, this explains to a large extent why workers, at any given levels of skills, are more productive in Austria – a basic intuition which William Lewis develops in his book The Power of Productivity, projecting the gains that Mexican construction workers make when moving to the USA.

This does not mean, obviously that skills are irrelevant to the ambition of Western Balkan economies to reach high-income status and join the EU. In fact they matter a lot: including those one acquires on the job and so-called “soft skills”, which are increasingly important in today’s interconnected knowledge world. However, the priority should be to help companies to invest, expand and succeed so that the latent talent that exists today in the Balkans can be exploited in the first place.

There are three main reasons why policy makers in the Western Balkans should focus first on creating jobs before investing in “skills upgrading”:

First, too many skilled people don’t have a job. In most countries in the Western Balkans, less than 40 percent of the adult population has a formal job. This dismal performance (reminiscent of low income developing countries) is not explained by skills shortages, given that education outcomes are almost on par with Eastern European averages. 

Second, private firms themselves don’t report skills as a binding constraint. According to the World Economic Forum’s competitiveness indicators, skills shortages were only mentioned in Macedonia as one of the top 3 issues (highlighted by 10.9% of the respondents). In region’s largest economy Serbia, skills was on 14th place (3% of respondents). The main constraints are government bureaucracy, access to finance, corruption, government policies, political instability and tax rates. Indeed, most countries in the Balkans have problematic tax policies – especially the high entry level tax rates – which make it very unattractive to hire workers at the lower bound of the salary scale.

Third, it doesn’t make sense for small economies to try to generate all of the skills they need at home. My second daughter was born in Singapore by a Canadian doctor, who had settled and started her business there because doing so was easy and lucrative. Singapore – consistently at the top of Doing Business rankings – is a perfect example of how small economies can attract the scarce skills they do not have at home by opening up and offering an attractive environment for foreign firms and professionals. The same applies to the Western Balkans, where governments could allow people to move more freely across borders, thereby making it easier for firms – domestic and foreign – to attract specialist skills and in turn unnecessary for those skills to be developed at home (since specialist skills take considerable time and investment to grow). Once skills can flow across borders and are part of international supply chains skills upgrading would happen naturally as local workers learn from colleagues and converge towards international standards. In fact even successful big countries are part of a dynamic international labor market. Take the example of football in Germany, a country replete with good players and coaches. In the German Bundesliga, half of the players and almost half of the coaches come from elsewhere. Their talent and their drive does not take away local jobs but creates more: thanks to the internationalization of football, this sector of the economy is booming creating many more direct and indirect jobs compared to 20 years ago.

International football is also perfect illustration of the “fixed pie fallacy”: the mistaken view that there are only so many jobs available in a given economy. In reality there is always a lot of work to do and the limit, more often than not, reflects the inability of governments to create the right environment for firms to get on with it and push the frontier.
 

Comments

Submitted by Peter Quest on

Very true observation Wolfgang,

The challenge is felt heavily in Kenya and other countries in Africa, the population that possess skills hardly has anything to do, they have no jobs and turns to do anything that may give them income. there should be a linkage between jobs and skills.

Submitted by Paul Mburu on

I totally agree. However, one aspect missing from your article is how developing countries like Kenya with a huge skilled work force can create jobs for the locals

Submitted by Wolfgang on

Thanks Paul, your comment is similar to the one by Peter. A country like Kenya is starting form a lower base but has the demographic advantage of a growing labor force. The policies for creating jobs are known, first and foremost to allow local and international companies to invest and succeed in a competitive environment. The question is, if these often painful reforms (think of the port of Mombasa) actually done.
Wolfgang

Submitted by Anna Kowalczyk on

Very good blog Wolfgang, and I'd say your observations apply not only to Western Balkans!

Submitted by Wolfgang on

Thanks Peter,
Indeed, Kenya faces a similar challenge. Many bright minds and many challenges for business to expand! But some of the issues are also different. In Kenya infrastructure bottlenecks are a bigger issue and at the same time, I was told, that there seems a bigger push to reduce red tape.
Wolfgang

Submitted by Begnadehi Claude Bationo on

Thank you so much Wolfgang. This is a well drafted article and really interesting as it provided with evidence that jobs creation can really attract skilled people.
Best

Submitted by Tamara on

Thank you Mr. Fengler for thinking out of box and sharing your expertise.
Supporting everything you mentioned, I would like to add that e.g. Serbia's capacity to retain talent ranks it at 141st place among 144 economies (WEF The Global Competitiveness Report 2014-2015). Also, Serbia's capacity to attract talent is even worse - 143rd rank. So, it is not a surprise that skilled people leave the country, especially youth. Thereby, I wouldn't be surprised to see different statistics in the near future (e.g. less unemployed skilled workers), but I hope experts will not draw the wrong conclusions.
Enabling better conditions for doing business is first of all a need of unemployed people who have no one to represent their interests.

Submitted by Wolfgang on

Dear Tamara, you are quoting a very powerful statistics which shows how central it is to create an environment where Serbians can deploy their skills and that Serbia becomes an attractive destination for international talent. Thanks for sharing Wolfgang

Submitted by Joe on

Great article Wolfgang. While you are right that creating jobs should be the priority, all governments including Balkan governments spend a lot of money - and need to spend a lot - on education and vocationsl training. So should your article add a second priority: that education and training need to improve to match the skills needed when the jobs come? If done well, education and training can be called "skills upgrading" for the country as a whole. How to do this? Better leadership in public education and more demand from students (and parents) are necessary, but also more dialogue between the private sector and public education leadership.

Submitted by Wolfgang on

Thanks Joe,

as you saw the debate was about "jobs or skills" and programs that help to upgrade skills are always good to have. My focus was on jobs where the deficit is greatest in the Balkans. Here are the links to the other contributions of this debate, some of which are also covering the areas you are highlighting, especially my colleague Omar Arias.

Wolfgang
http://blogs.worldbank.org/futuredevelopment/best-school-entrepreneurship-job-not-classroom
http://blogs.worldbank.org/futuredevelopment/skills-gaps-and-jobs-strategies
http://blogs.worldbank.org/futuredevelopment/how-break-curse-unemployment-jobs-first-or-skills-first

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