Determinants of skill shortages in Indian firms: an exploration.

AuthorMurti, Ashutosh Bishnu
PositionBy Invitation


There is ongoing concern about the shortage of workforce with particular skill as unfavorable to the growth of firms and economy at large. Moreover, information is available at the aggregate level on skills issues, rather than how these issues affect individual firms in India. Global evidence suggests that the availability of workforce with the appropriate types and levels of skills has foremost impact on the success of the firms. Limited research conducted globally suggests that "Skill shortages directly constrain production and prevent firms from meeting demands and using available inputs efficiently with consequences for lower productivity" (Haskel & Martin, 1993b).

The measurement of skill shortages and gaps to an extent is dependent on the definition of skill shortages used. The definitions of skill shortages that are derived from macroeconomic (1) and microeconomic (2) indicators indirectly restrain innovation and use of new technologies which are skill intensive. This may lead to have long term impacts on the way firms do business, in terms of their location, size, structure, production methods and product strategy (3). Thus, exploring how these skill shortages manifest them will not only help industry to fill skill gap but also improve international competitiveness.

This paper aims to unravel our understanding of skills within Indian firms. At first this paper discusses the microeconomic measures of skill shortage and explores the determinants of skill shortages i.e. vacancies which are hardto-fill due to skill-related reasons. Moreover, the paper tries to explore the probability that the firm had any vacancies and hard-to-fill vacancies in the last year. This paper uses two methods to investigate the determinants of a firm reporting the three types of vacancies. First, we estimated separate chances for the firm reporting each of the vacancy types. However, the mechanisms causing firms to report each of the different types of vacancies are likely to be interrelated. All skill and non-skill related shortage vacancies are by definition hard-to-fill vacancies. In addition, a proportion of firms have vacancies while other firms do not have vacancies so it is important to account for the factors which influence the reason firms recruit as opposed to those which do not.

Skill Shortage--An Overview

It is surprising that mainstream economic theories have not contributed significantly on the issues of skill and tends to work with open concepts of labor supply and demand. Applied labor market research has advanced on general accepted understanding of 'skill' which means the ability to execute specified tasks. However, classifications of skill dimensions are based on particular tasks and level of ability (training) needed. The very notion of a skill shortage can be helpful because of its broad perspective but it may not match-up with the employers' explanation.

Besides, previous research has pointed out ambiguities over both the notion of 'skills' and of 'shortage'. It is often apprehended that the 'skills' are being referred as technical, defined by the ability to perform given tasks or to master various techniques, whether manual or cognitive. The study conducted by Oliver & Turton (1982) explores what employers mean by skills (when they refer to skills shortages) encompassing also a range of behavioral attributes such as reliability, ability to work without supervision and stability of employment. Bosworth, Dutton & Lewis (1992) recognize both behavioral attributes and technical skills which are included in the potential list of qualities that employers are looking for.

The global concern regarding skills shortages has 'become more the new millennium' (Cohen & Zaidi, 2002:1). India shares the same concern. In the research titled 'Global Skill Shortages', Cohen & Zaidi (2002:1) argue that the world is heading into 'new periods of skill shortages in the 21st century'. Indian newspaper reports echoes this concern about current skills shortages and the negative impact this might have on local economic expansion. A number of Indian companies had been experiencing a significant shortage of skilled and competent personnel which has increased in recent years. This is in direct contrast with the recent economic expansion in India. Companies are anxious that this will place Indian firms at a disadvantage when they compete with international business groups.

Indian press reports in recent years like "India: Desperately Seeking Talent" (4) shows the ongoing shortage of skilled professionals, echoing concerns expressed at the various levels of the supply and demand mismatch in the country. Public debate over the nature of the skill shortage in India is central to questions of sustainability of current and future economic expansion. While many industries are having trouble finding the right employees, they have so far managed by hiring less-skilled employees and training them.

Organizations in India operate in a highly competitive local and/or global economic environment. Their competitiveness is compromised by the shortage of skilled professionals in the local labor market. The skills shortage in India is resulting in serious cost implications for organizations causing major delays and cost overruns. An examination of the relationship between local and global skill shortages to that of supply and demand provides an opportunity to identify the specific problem(s) and ultimately find the solution to this complex issue.

In the world of empirical work, shortages have always been interpreted or even defined directly in terms of difficulties in filling vacancies or job. The empirical work of Haskel & Martin (1993a) treated the CBI (5) skills shortage as an indicator, a proxy for the average duration of vacancies of skilled labor &Stevens (1994) uses the same indicator as a proxy for the marginal cost of recruiting skilled labor. Haskel & Martin (1993b) and Bosworth (1993) measure skills shortage in various ways directly as a hard-to-fill vacancy.

There has been limited research which focuses on the determinants of vacancies. Undoubtedly research is being impacted by dearth of data on vacancies and vacancy rates. In this paper, an important objective is to explore the determinants of vacancies at the firm's level. The discourse here is most closely related to Holzer (1994) in that the concern here is with both vacancy incidence and vacancy rates. However, in distinguishing between the various types of vacancies (hard-to-fill and skill-shortage vacancies in particular), there are clear parallels with the recent work of Haskel & Martin (2001) who utilize 1991 Employee Manpower and Skills Practices Survey (EMSPS)

The determinants of skill mismatch are both cyclical and structural. On the one hand, skill mismatch has been found to be pro-cyclical with recessions causing firms to separate from the matches with the lowest productivity. (6) On the other hand, some structural changes--such as the adoption of new technology--require skills that are not immediately available in the labor market. While education/vocational systems adapt to these new skill requirements, firms experience skill gaps between their employees' skills and those required by the jobs they fill. (7) Also, the institutional framework regulating the labor market will influence the speed at which firms are able to adapt to structural change.

Firms may also view labor shortages as internal skill deficiencies (where the skills of their existing workforce are below some optimal level), or skill gaps (where firms' existing workers lack sufficient skills to perform their jobs effectively). Moreover, Oliver & Turton (1982) point out those firms may identify as important requirement to cope with non-routine technical problems, to work with little or no supervision or to have speed on the job and be reliable. However, these are different in their implications from skill shortages, although they are often conflated in practice (Shah & Burke, 2005). Interestingly, hiring standards are adjusted according to the country of the labor market. When demand is high, employers may be forced to take on workers who lack experience, qualification and other desired personal attributes. In contrast, when demand is low and labor is abundant, firms may raise their expectations and look for qualities beyond those required in terms of the technical capacity to perform the job (Richardson, 2007). This further explains that in tight labor markets the number of under-educated and under-skilled workers is likely to increase, while in slack labor markets the number of over-educated or over-skilled workers is likely to do likewise. These imbalances have implications for the chance of both internal and external training being offered as a response to balance the imbalances. Therefore hiring standards may vary, according to different stage of the business cycle.

Very few empirical works looked at the determinants of skill mismatch...

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