European economies rank amongst the most competitive in the world[1]: a highly qualified and educated workforce, a developed infrastructure, and mature institutions have all served to attract foreign investment, promote European exports, and nurture domestic innovation, entrepreneurship and productivity. The EU is one of the main destinations for Foreign Direct Investment (FDI), receiving around a fifth of 2014’s FDI inflows[2], produces nearly a third of the world’s science and technology products[3], whilst the tenth of the global population based in Europe produces a fifth of global exports and imports[4]. Europe’s highly-educated and highly-skilled workforce accounts for no small part of this success.

But the global economic map is shifting. Alongside traditional competitors such as Japan, the U.S., and the Asian ‘tigers’[5], a new generation of emerging economies is seeking to compete with Europe in the high-end service and product markets. What does this bode for Europe’s competitiveness? And why are skills critical factors into the equation?              

Skills: a key element of competitiveness

Most of EU Member States are considered to be innovation-driven economies[6] – economies which, unable to compete on the basis of price due to high wages, rely on innovative, high-quality and high-tech industries and services. This does not just mean traditional high-tech sectors, such as pharmaceuticals, ICT and high-end manufacturing but also services. Therefore the majority of the new jobs in Europe over the period to 2025 are expected to require high qualifications and high levels of general and sector-specific skills. The importance of high qualifications is further corroborated by the fact that the majority of new jobs projected by occupations also demand high qualifications (see Cedefop Skills Forecast 2015).

Supporting high-quality and high-tech industries and sectors requires a highly developed infrastructure: regular access to basic resources, such as internet connectivity and power; transport networks; strong institutions and protection for intellectual and physical property. And it takes skills.

Human resources are a key aspect of building a successful, innovation-led business. On a local scale, skilled workers nurture domestic innovation: small and emerging businesses need to be able to access a range of skills in their domestic labour market, not only to create innovative new products and deliver professional services, but also to fill the need for skilled administrators, IT professionals and other ‘backroom functions’ essential to daily operations. On a national and European scale, skills attract investment: companies seeking to start up or expand want to do so in a market from which they can draw from a pool of high-skilled, educated workers. A high-skilled, productive workforce and the alignment of specific skills with the needs of business do not just keep the domestic economic cogs turning; they allow European exports and companies to compete for customers and FDI in the global market.

But matching inefficiencies are at play

At least, in theory. In reality, significant barriers can prevent the efficient matching of skills with job needs: in the 2013 Eurofound Company Survey, 39% of companies reported difficulties[7] in finding employees with the required skills. Although recruitment difficulties can result from job offers of poor quality and inefficient recruitment practices, shortage of skilled workers can decrease productivity and global competitiveness and raise business costs, as businesses struggle to recruit workers with the correct skills profiles. Whilst the single labour market has reduced obstacles to matching the skills in one Member State with jobs in another, the language, cultural and administrative challenges of migration still hinder the development of a fully mobile labour force. High rates of tertiary qualifications across Europe may not necessarily mean high rates of skilled workers; graduates may not have job-ready skills, and require periods of transition. In addition, certain STEM sectors[8] (science, technology, engineering and mathematics), many of which require specific tertiary or VETset to experience faster growth than other employment sectors; whilst the computing services sector is growing at over double the rate of employment more generally (see, for example, the Analytical Highlight on European Job Growth Creators). This may result in sector-specific skills shortages. On the demand side, a lack of vacancies in some EU countries for skilled workers may spark a brain drain as they seek opportunities abroad - which may have the knock-on effect of preventing further high-skilled job growth[9].

And competition looms

The EU’s main competitors, such as the U.S., Australia, Japan, the East Asian ‘tigers’ have a highly-skilled workforce: high levels of qualifications, dedicated VET and adult learning policies, high basic literacy and numeracy levels throughout the population, and high quality in education provision. Other countries, such as Malaysia and Turkey, both with well-educated populations and developed infrastructure, are considered ‘in transition’[10]: shortly set to join the ranks of the innovation-led economies and with increasing resources to compete in those markets.

And there are more changes on the horizon. The large populations and low labour costs in countries such as China and India have made them popular destinations for low-skill work, such as low-value manufacturing and assembling. The relatively lower levels of basic skills and qualifications have traditionally presented greater barriers to entrepreneurial activity within these countries, and made them less attractive for companies seeking to produce high-end or innovative products and services.

However, recent years have seen a move by some of these countries towards competing in the same high-end industries favoured by European companies. Increasing investment in innovation and participation in education is levelling the global skills playing field – and bringing the economic and competitiveness benefits of a high-skilled population in their wake. China and India will alone comprise almost half of G20 graduates by 2030[11], including 60% of total STEM graduates. The movement of manufacturing jobs abroad is well documented; but buoyed by ever-better communications technologies and an increasingly skilled global workforce, increasing numbers of white-collar medium- and high-skilled occupations may follow[12].

This is particularly prescient in light of the increasing ‘splitting’ of global value chains across countries. As production processes further fragment so does the competitive advantage offered by all-round, high-skilled workforces. Countries need no longer offer a workforce able to take on all the high-end and low-end functions of a production process; they need a concentration of skills within particular sectors. This could be a beneficial development – by aligning skills on a global level, both EU and global productivity may improve[13]. But as clusters and specialisms develop, it may change the nature of what Europe contributes to the global production chain – and the skills profile needed by each Member State to remain competitive.

Going forward: acknowledging the importance of skills

Strong formal education and VET systems will continue to play major roles in delivering basic and sector-specific skills, and so will on-the-job training, adult learning and up-skilling initiatives, as the European labour market is forced to respond to changes in global demand for its products and take advantage of new technologies and innovations. Initiatives to aid job mobility that will enable skilled workers from one European country plug the skills gaps in another will also be vital in helping to minimise skill shortages and respond to changing labour market dynamics.

But perhaps the more critical aspect is the recognition of a skilled labour force as the core part of Europe’s current and future success. Skills underpin the fundamental functions of the society, such as healthcare, education and institutions, but also Europe’s ability to grow and compete globally. As the world economy steps further toward a period of rapid and unknown change, acknowledging this will be the first task.

 

[1] http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2014-15.pdf

[2] http://unctad.org/en/PublicationsLibrary/webdiaeia2015d1_en.pdf

[3] https://ec.europa.eu/research/innovation-union/pdf/competitiveness_report_2013.pdf#view=fit&pagemode=none

[4] http://europa.eu/about-eu/facts-figures/economy/index_en.htm

[5] http://oecdinsights.org/2012/05/03/getting-globalization-right-the-east-asian-tigers/

[6] http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2014-15.pdf

[7] http://www.eurofound.europa.eu/sites/default/files/ef_publication/field_ef_document/ef1502en_0.pdf

[8]http://www.europarl.europa.eu/RegData/etudes/STUD/2015/542199/IPOL_STU%282015%29542199_EN.pdf

[9] Ibid.

[10] http://www3.weforum.org/docs/WEF_GlobalCompetitivenessReport_2014-15.pdf

[11] http://www.oecd.org/education/EDIF%2031%20%282015%29--ENG--Final.pdf

[12] http://www.strategyand.pwc.com/media/uploads/TheGlobalizationofWhite-CollarWork.pdf

[13] http://www.oecd.org/sti/ind/interconnected-economies-GVCs-synthesis.pdf