Understanding local economic performance: Skills

Skills are an important driver of local productivity and output. This briefing will help local policymakers understand how to think about the skills performance of their local area and develop appropriate policies.

This briefing is part of a series that provides guidance to help policymakers think about local economic performance. It overviews key economic concepts and provides guidance on data and analysis.

What are skills?

Skills are the combined knowledge, competence, and abilities required to complete a task successfully. Skills are developed through education, training or other personal development activities, in formal (school, college, university, apprenticeships, etc.) and informal settings (a friend shows you how to use a piece of software).

There are many different types of skills. Some important classifications include:

• Basic skills are needed to function in work and society and to acquire higher level skills. Examples include literacy, numeracy, and basic digital skills.
• Technical or hard skills are specific knowledge, competence, and abilities needed to perform specialised tasks, often developed through education and training, and can be objectively assessed and accredited.
• Soft skills enable individuals to interact effectively with others and include communication, problem solving, teamwork and traits such as adaptability, flexibility, and positivity.
• Transferable skills can be applied across different industries, occupations, businesses, and roles. This includes many ‘soft’ skills such as communication and problem-solving skills and some ‘hard’ skills, like coding or data analysis.
• Non-transferable skills are specific to a particular industry, occupation, business or role.

As it is difficult to measure skills, qualifications are often used as a proxy. One downside of this is that skills that are developed in informal settings, including many developed ‘on-the-job’ are not captured in qualifications data. For example, many more individuals will have communication or project management skills than qualifications data will suggest.

Why are skills important for local economic performance?

Skills are an important driver of productivity. Productivity measures how efficiently inputs (resources, or factors of production) are converted into outputs (goods and services). Inputs include workers and their skills (human capital), buildings and machines (tangible capital), and ideas and knowledge such as design, branding, R&D, and software (intangible capital). Anything that increases the amount of capital per worker (human, tangible or intangible capital) will usually increase output per worker (productivity).

As a key component of human capital, skills contribute to higher productivity through three main mechanisms:

• First, skilled workers should be able to produce more goods or services than an unskilled worker. For example, a skilled bricklayer should be able to construct a wall more quickly than someone who is untrained.
• Second, skilled workers can produce higher-value goods and services than those without skills. For example, biomedical engineers can develop products that are highly valued by society.
• Third, management and leadership skills can improve the organisation of inputs and increase productivity.

Skills have become more important as the UK economy has moved from manufacturing (which relies more heavily on tangible capital) to services (which rely primarily on human and intangible capital). Human and intangible capital are increasingly important in explaining productivity disparities across the UK.

Thinking about local skills performance

Some key concepts and considerations include:

Demand for skills comes from employers. The skills demanded will depend on the goods and services produced (for example, housebuilders are looking for bricklayers, electricians, plumbers, etc.). Generally, the scale of demand for skills will reflect the demand for the goods and services they help produce.

Individuals supply skills. Individuals decide which skills to develop based on range of factors including the potential wages associated with different skills, the costs of development (including opportunity costs), and personal interests and preferences.

Alignment between supply and demand is mediated by labour markets. Where demand and supply are not aligned, there is a mismatch. Mismatches can have negative effects on employers, for example, reducing the quantity or quality of their outputs or preventing them from expanding. When these are widespread across the local economy (or affect a major local employer), they can impact on local economic performance. As skills often take significant time to develop (for example, many apprenticeships take three years), it can take a long time to resolve mismatches.

There are multiple, overlapping labour markets. For example, the labour market for graphic designers overlaps with markets for other types of designers and illustrators. For this reason, wherever possible, it is helpful to go beyond headline data to look at data on specific skills (for example, by using occupations or subjects) and levels. Commuting time and cost play a role in determining labour markets, which also overlap geographically. Few people can take jobs located a long distance from where they live. In general, labour markets for higher, more specialised skills are geographically larger.

Where demand for a skill exceeds supply, this will generally lead to an increase in wages, encouraging more individuals to develop these skills or for individuals with those skills to move into the area. Where there are constraints on developing these skills (for example, local education providers do not have capacity) or on in-migration (for example, due to housing shortages), this can limit the labour market’s ability to adjust.

Understanding local skills performance

The guide provides a guide to understanding key elements of local skills performance including:

• Overall position
  • Skills demand
  • Skills supply
  • Commuting patterns
  • Alignment between demand and supply
• Labour market entrances and exits
  • Population change
  • Uptake of training and education
  • Student destinations
• Sectoral analysis
  • Sectoral skills demand
  • Sectoral skills supply.

For each topic, important considerations, including what might affect performance, are set out, alongside suggested datasets and measures, example analysis, and policy implications.