| Summary: | Workers that fulfil the current skill demands of firms are an essential component of a correctly functioning labour market. A recent survey conducted by the Prince's Trust and HSBC interviewed over 600 business leaders from firms with more than 500 employees in all major sectors. In excess of 40% of these business owners said they were already experiencing skills gaps within their firms, while more than half also faced difficulties filling vacancies. What is possibly more concerning for the UK economy is that over two-thirds of the business leaders (68%) said they held fears that skills shortages would slow down any form of economic recovery, with an alarming 35% harbouring fears that these skill shortages would cause their business to fail. Skill deficiencies appear to be a major issue in the United Kingdom, both in terms of their number, and the lagging economic performance that is blamed on them. Despite anecdotal evidence, and logical arguments, that these deficiencies are having a negative impact on the economy, very little empirical evidence exists. The principle aim of this thesis is to examine the impact that skill deficiencies are having on the UK economy at differing levels of aggregation. This will include looking at the effect in terms of the economy as a whole, from the perspective of establishments and from the perspective of employees. Chapter 2 investigates how establishments respond to Hard to fill Vacancies (HTFV) and Skill Gaps (SGs) within the premise of a low skill equilibrium framework. Generalized Poisson and Zero Inflated Negative Binomial models are fitted to a count of establishments' positive responses, using data from the 2005, 2007 and 2009 waves of the National Employers Skill Survey. The results indicate that most establishments do not respond in a negative way (cutting jobs) to HTFVs or SG. This suggests that a low skill equilibrium is not an economy wide issue. There are some occupations that seem less likely to respond to both internal and external skill gaps, and these areas are the intermediate skilled jobs where Skill Biased Task Change and job polarisation have been seen. Most noticeably a negative response has been seen in the following occupations; 'Administrative', 'Skilled Trades' and 'Machine Operatives'. In these intermediate skill occupations there does seem to be evidence of negative employer responses to skill deficiencies, which may suggest a downward skill trajectory exists for this subsection of the economy. Chapter 3 constructs an establishment-level dataset by matching productivity data from the Annual Business Inquiry (ABI) to skill information from the National Employers Skill Survey (NESS). The effect of internal skill gaps on productivity is then examined for the successfully matched workplaces. An IV estimator is used to remove the endogeneity of inputs problem, with lagged labour costs used as an instrument. Result from this regression analysis are contrary to prior expectations and suggest that the selection issue, whereby establishments that are more likely to have a skills deficiency may be the more productive workplaces, may be more significant that first believed. Due to this selection issue both a Heckman two-step model and Propensity Score Matching are investigated. The results suggest that while skill gaps are not having a positive effect on productivity (as was originally suggested by the IV results), they are not having any significant impact. Chapter 4 attempts to establish whether there is a causal relationship between the level of skill deficiencies in a market and the remuneration workers receive in that market. In order to do this information on skill deficiencies from the Employers Skills Survey (ESS) is matched at an industry/occupation level to the Labour Force Survey (LFS) over the period 2006 to 2012. This information is used in a pseudo panel framework to test if wages in markets with greater skill deficiencies are higher than those in markets with lower skill deficiencies. To validate this result regressions were run on an individual's wage, with market level skill information matched in from the ESS. This allows us to further test if workers in markets with higher skill shortages receive a higher wage. An additional effort is made to decompose which workers gain (or lose) the most from being in a market with skill deficiencies. The results suggest that high levels of SSVs in a given market have a positive impact on a worker's wage. The analysis on SGs shows varying sized coefficients, but continuously suggests that SGs do have a significant negative effect on wages in the given market. This thesis concludes that skill deficiencies do not have the clear negative effect on the UK economy that has been anecdotally claimed. There is no negative effect found on establishments' performance, and while intermediate occupations could be at risk of a downward spiral of skill attainment, the rest of the economy is not. It is believed that while a negative impact has not been seen in this work, this is more likely due to data limitations. Care should be taken when drawing implications from this work and further analysis should be conducted in regards to this topic.
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