No silver bullet for skill shortages

For businesses and government, trying to get labour market policy settings right is like trying to best an octopus in an arm wrestle. Wrestle one policy outcome down – for example, full employment – and the tentacle of a related issue – skills shortages - will inevitably reach around and pick up the fight.

Such is the challenge facing Australia today. In 2019, net migration added 250,000 people to our population, while in the year to March 2021, for the first time since WWI, net migration resulted in 95,000 fewer people in Australia. 

The impact of these border closures add up, with Australia facing a cumulative migration shortfall of more than 375,000 migrants in just one year, and the Government’s Intergenerational Report suggests a shortfall of 830,000 people by 2024.

The closed international border, however, has helped Australia’s battle against Covid-19. Our good health outcomes, alongside policy action to support household and business balance sheets, underpinned a stronger, faster and broader economic recovery than expected, spurring strong jobs growth. This drove a decline in unemployment rate (among the fastest in Australia’s recorded history) and a record high in job vacancies prior to the recent lockdowns. This historically tight labour market, however, is already causing challenges for employers as we reopen the economy.

While opening our borders will ease this pressure, it is not the silver bullet to the looming skills crisis that many believe it to be. Australia is facing structural skills shortages which have previously been masked over by high levels of migration, with the only question remaining; how quickly can our labour market adapt, and how long will the skills crisis last?

Migration is only part of the labour force picture

Education and training play a significant role in labour supply, supplemented by skilled, temporary and other forms of supported migration. Examining this more closely, in 2019 migration accounted for less than one fifth of the annual flow of labour market supply – but a critical aspect as it typically reduces skills shortages where other forms of supply have lagged the market.

Given the size of the labour force flow coming from domestic sources, it’s important that graduates have the right training and skills to fill areas of medium-and long-term demand across the economy. 

However, our domestic training institutions are lagging the market significantly, both in relevancy and volume, with VET completions having declined markedly over the past 5 years. In fact, if the VET system had maintained completions at 2016 levels over the past four years, Australia would likely have more than 150,000 additional skilled VET graduates today, ready to fill many of the roles which are already seeing elevated vacancies. 

At a higher degree level, studies have demonstrated university graduates are often overqualified for the roles they are in, or there are mismatches between the skills available and those required. A telling example is that despite the digital revolution, only 3 per cent of domestic graduates have an information technology qualification, down from 6 per cent in the early 2000s. 

A labour force stuck in time

Unfortunately, it’s not just training and higher education indicators of labour force adaptability and flexibility that have been heading in the wrong direction for some time, indicating that the skills crisis will have a large impact over the medium term.

Occupational mobility - the number of people moving between jobs annually - has been declining for five decades and has hit a pandemic-induced low of 7.5 per cent. This declining mobility is not entirely unique to Australia, as analysis from the OECD shows labour market mobility in the United States has declined substantially since the early 1990s according to a range of measures and data sources.

State migration has also fallen sharply over the past decade. Since 2010 only 1.5 per cent of Australians moved across state borders annually, down from 2.0 per cent during the 1990s – equivalent to around 100,000 less people moving across state borders during a ‘typical' year, during 2020 this reduction in mobility lifted to 150,000. If the rate of mobility seen during the 1990s was maintained through the 2010s more than 1.2 million additional people would have moved interstate over the last decade, in many cases to fill labour shortages or find jobs with a better skills match.

While the pandemic has accelerated working from anywhere for many occupations, many of the skill shortages emerging are in occupations that require a physical presence.

Together, these factors mean that a skills shortage is the new normal for many employers, and will become a significant issue for policy makers if it is allowed to impede on Australia’s progress.

Supply of suitable labour is the real headwind

Our EY Labour Market Model captures the metaphorical tentacles of Australia’s labour market to provide a comprehensive occupation-by-occupation forecast of skills shortages, and potential sources of supply. This model brings together demand and supply dynamics, the interlinkages of migration, occupation-shifting, retraining, vacancies and interstate mobility to show where skills shortages will appear, and where employers can look to fill them.

We have demonstrated the power of this model through analysing the supply and demand dynamics of six occupations of national significance to demonstrate the impact of the different structural challenges we face.

This model can be applied to any occupation in the economy to provide occupation and industry specific insights to inform workforce planning, business forecasting and disruption planning. 

The profiles from EY’s Labour Market Model reveal these shortages are unique to each occupation, but share a common thread of being hampered by the growing rigidity in the Australian workforce – from occupation and geographic mobility to the training and education sector.

The VET system has delivered in some parts more than others

Nursing support and personal care workers

Caring professions are an occupation commonly held by women across Australia, with 87,000 people (0.7 per cent of the workforce) employed as nursing support and personal care workers - a critical cog in the health network. While there are currently acute shortages in this occupation, driven in part, by the increased demand on the entire health network, skills pressures are expected to ease somewhat – as supply from the VET sector continues to grow strongly. However, state-by-state outcomes differ as some states, for example, South Australia – will need to incentivise more VET completions or inter-state migration to fill predicated skills imbalances.

Motor Mechanics 

Like many other occupations motor mechanics, which represent 0.7 per cent of the workforce (98,000), are currently facing supply shortages, challenged by slowing domestic supply from the training system, the closure of the international borders, and reduced geographic mobility. Looking forward this imbalance is likely to grow, especially in the mining states of QLD, WA and the NT, where the VET system has failed to deliver enough graduates to ease supply concerns.

Demand for physical and digital capital is incredibly elevated.

Software & Application programmers

Software and application programmers’ number 150,000 individuals (1.1 per cent of the workforce) and is among several fast-growing tech sector occupations (11.3 per cent annually over 5 years). The COVID crisis has simultaneously accelerated our economy’s digital transformation and put a halt to a key source of skills supply from overseas. Over the past decade, our reliance on international migration to fill our skills needs in the sector have increased as the share of tertiary graduates completing a course in the information technology field has fallen. The shortfall in migrants from the closure of the borders is expected to lead to widespread imbalances across the country.

Civil Engineering professionals

Civil engineers, which number 61,000 (0.5 per cent of the workforce), are at the centre of state and federal government investment program and will continue to be in demand given the long lead times on projects. Over recent years, a plateauing in higher education graduates has put more reliance on international migrants to meet skills needs in this occupation, following a similar trend to software programmers. Skill shortages are expected to increase from here, largely localised in the eastern states of New South Wales and Victoria as infrastructure investment ramps up.

Two sides of the migration coin

Truck drivers

The most commonly held occupation for men across Australia, Truck Drivers number 180,000 people (1.4 per cent of the workforce) – literally – keeping the economy moving. Since the Pandemic began truck drivers have been a critical part of the supply chain with the demand for goods booming while services industries shut their doors. This occupation has no access to 457 visas, so relies less on skilled overseas migrants, however, with demand expected to outstrip supply in the smaller states there is a role for increased internal migration to play in filling skills gaps across the country.

Chefs

Chefs, like many other food industry occupations, have been at the centre of much of the economic disruption since the Pandemic began. The impact of lockdowns on cafes and restaurants has been clear for all to see, however, the impact on the 90,000 (0.7 per cent of the workforce) strong workforce may not be as obvious. With a high reliance on international migrants to fill skills gaps, this occupation did not receive as many benefits from government policy – for example, JobKeeper did not apply to temporary skilled visa holders – and many of these people were encouraged to return home. This has left the occupation with shortages now and into the future, with VET outcomes having disappointed recently and the border reopening unlikely to catch up on migration levels for several years.