Skills shortage hinders Asia Pacific growth

The Asia Pacific region is positioning itself as a centre of industrial production and services, providing a high level of global industrial exports, particularly of technological and electrical goods.

This has made the region an attractive location for foreign investors, as firms seek to take advantage of relatively low labour costs and available technical skills.

However, there is a growing shortage of skilled labour as skills are lagging behind economic transition to highly industrialised and service facing economies. This could curb economic growth by reducing labour productivity and deterring foreign investment.

Key points

  • Production of high-level industrial and electrical goods requires an increasing number of skilled workers with niche specialities;
  • Economies are also shifting towards service industries, particularly those like India that are becoming outsourcing centres, and Singapore and Hong Kong that are financial service hubs;
  • However, insufficient targeted investment in education and training is reducing the pool of suitable workers;
  • This is a particular limiting factor in those countries that have traditionally been heavily reliant on the agricultural sector, such as Vietnam, India and Bangladesh;
  • Particular shortages are in the areas of language skills and technical qualifications, especially those that are internationally recognised;
  • Shortages of skilled labour are increasing wages for skilled workers, eroding labour cost competitiveness;
  • In the long term, failure to invest in greater education and training will create a less attractive labour market, reducing the potential for foreign investment and economic growth.

Background

From being a traditional exporter of commodities, such as rice, grain and oil in the early 20th century, the Asia Pacific region has redeveloped itself as a prime location for the manufacture of industrial goods, with manufacturing of electronic goods a lucrative and growing sub-sector.

This requires workers to be skilled both in low-level industrial techniques, primarily machine operation, through to high-level niche requirements such as computer programming and technological design. With labour costs substantially lower than in the traditional industrial regions of Western Europe and North America, Asia Pacific is an attractive destination for outsourcing and investment, meaning that language, management and HR skills are a growing requirement.

Skills requirements

Asia Pacific’s labour force is increasingly focused towards industry and services:

  • In 2007, 14.2%, 49.3% and 15.9% of Asia Pacific’s exports were of basic manufactures, machinery and transport equipment and miscellaneous manufactured goods respectively;
Asia Pacific exports by commodity: 2007
Source: Euromonitor International from International Monetary Fund (IMF), International Financial Statistics.
  • Singapore, Hong Kong and Taiwan have also developed lucrative financial services industries;
  • India and Pakistan are increasingly becoming outsourcing service centres for Western European and North American firms;
  • This means that a new skills set is required as economies begin to transition to higher level services. Particular skills required include managerial skills – training for which is usually ad hoc and on the job rather than specific courses – and human resources skills;
  • Industrial production requires training a range of skills, such as machine operations, design skills, computer literacy, computer programming skills, engineering and component manufacture and assembly;
  • Increased outsourcing and relocating to Asia by foreign companies means that foreign language training is also required, particularly in English.

Candidates with the requisite skills are highly sought after, increasing their ability to bargain for wage increases.

Skills shortage

However, there is a growing skills deficit in Asia Pacific, since rising demand for higher skills is not being matched by human capital supply:

  • A 2007 survey by recruitment firm Manpower Inc found that 61% of employers in Japan are experiencing difficulty finding suitably qualified employees;
  • Only just behind were Singapore, Taiwan and Hong Kong, in which 57%, 52% and 49% of employers respectively had difficulty finding suitable workers;
  • The situation was better in China and India, in which only 19% and 9% respectively of employers had difficulty filling jobs;
  • The companies surveyed stated that the jobs for which they had most trouble finding qualified workers were engineers, technicians and sales representatives.
Firms experiencing difficulty filling positions in Asia Pacific countries: 2006 and 2007
% of firms surveyed

Source: Manpower Inc.

These jobs require high-level skills, indicating that local labour supply is insufficiently educated and trained.

Education and training

A lack of targeted investment in education and training is reducing the skills sets available, making workers less attractive and reducing their ability to get well-paid jobs. As rapid economic growth occurs across the region, the levels of skills and education required have not matched economic advancement:

  • In 2007, government spending on education in the Asia Pacific region totalled only 9.8% of GDP;
  • Government spending on education in 2007 in those countries registered by the Manpower survey as posing greatest difficulty for employers totalled 10.8% of GDP, 22.2% of GDP, 28.4% of GDP and 22.1% of GDP for Japan, Singapore, Taiwan and Hong Kong respectively;
  • This indicates that it is not so much under-spending on education that is causing the skills deficit but a lack of targeted investment and a mismatch between current training and the new skills that are increasingly being required;
  • For example, Indian software industry body Nasscom has stated that India needs 350,000 trained engineers per year, but that college and universities are only producing 150,000 engineers per year;
  • In addition, China is experiencing a similar skills mismatch, with unemployment rising since undergraduates do not possess the required skills set. In 2007, approximately 56% of undergraduates were facing unemployment following graduation.

Lack of investment in specifically high-level training is producing shortages of highly skilled workers. This is positive for those workers who can therefore demand higher wages, but negative for companies, who will experience a loss of productivity and business profit owing to labour shortages.

Training shifts

Directed training has been particularly lacking in those countries which have traditionally large agricultural sectors:

  • In 2007, 51.7% of Vietnam’s population was employed in the agricultural sector, compared to 15.6% in the manufacturing sector;
  • In Bangladesh and India, 63.0% and 60.0% respectively of the population worked in the agricultural sector;
  • Education and training remains focused towards the more numerous agricultural sector and its requirements. For example, in India in 2007, only 3.8% of the population had completed a higher education course, compared to 6.4% in China and 18.7% and 18.1% in Singapore and Hong Kong respectively;
  • However, highly skilled workers earn more, contributing to economic growth in the form of higher consumer spending;
  • Accordingly, countries such as Singapore and Taiwan are seeking to attract highly skilled immigrants, particularly possessing trained management skills, through inducements such as tax incentives and visa permits;
  • In addition, high prices for industrial goods means that the sector’s exports often contribute more to GDP than agriculture. In 2007, manufacturing and agriculture contributed 23.1% and 6.5% of GDP respectively in the Asia Pacific region.

Negative implications

This emerging skills deficit will have negative implications for businesses and the economy as a whole:

  • Labour shortages mean that high skilled workers will be able to demand higher wages, increasing business costs;
  • Increased competition for highly skilled workers will mean that job retention rates drop, reducing business productivity. For example, a 2007 survey by international research group ISR Consultancy found that 40% of workers in Singapore were at ‘high risk’ of leaving, meaning that they were actively looking for new jobs since high demand for skilled workers mean that they were likely to get pay rises and promotion if they moved;
  • In the long term, this will deter foreign firms from investing in countries where they are unable to find sufficient supplies of skilled workers;
  • This is also raising start-up costs for businesses relocating to the region since they have to budget for on-site training of local workers;
  • In 2007, foreign direct investment in South, East and South-East Asia totalled US$224.0 billion, up from US$199.5 billion in 2006. Slowing foreign investment will weigh on economic growth, reducing the potential for long term job creation.

In the short term, the skills deficit will benefit highly skilled workers by artificially inflating their wages. However, in the long term it will weigh on economic growth, with negative implications for consumer spending growth.

Future Scenarios

Efforts are being made to improve skills training in the region:

  • For example, since 2003 China has made English language training compulsory in schools from the third grade;
  • In addition, many governments are encouraging private companies to take on some of the burden of training workers;
  • In China, major international firms such as Microsoft carry out language and basic skills training for local recruits, and provide more advanced technical training at a later stage;
  • Initiatives along these lines will help to ease the skills shortage, but sustained investment in training is required;
  • Economic growth in the region is forecast to remain strong, with growth of 5.7% forecast in 2008, down slightly from 6.2% in 2007;
  • The global slowdown will have some impact in that reduced demand from the US for Asian goods and services will reduce economic activity in Asian countries, particularly those with strong trade links to the USA. The US economy is forecast to grow by only 1.9% in 2008, as concerns about bad credit loans dent consumer spending and business confidence;
  • The ongoing transition to higher level economies will continue to boost demand for management and personnel skills, encouraging a re-evaluation of training skills on offer;
  • In the meantime, economies will seek to attract highly skilled immigrants to fill the skills gap, with Singapore, for example, seeking to increase its population to 6.0 million by 2028, from 4.5 million in 2007, via immigration.

In the short term consumer spending growth in Asia Pacific will remain strong, in accordance with economic growth projections. However, unless there is greater investment in technical training in the longer term, both economic growth and related consumer spending will suffer.