Forecasting future demands: What we can and cannot know

By Sue Richardson, Yan Tan Research report 19 July 2007 ISBN 978 1 921170 68 3

Description

The vocational education and training (VET) sector seeks to teach courses that will meet the future demands from employers in terms of the quantity and types of skills required. This report, which is part of the larger consortium program, 'A well-skilled future: Tailoring VET to the emerging labour market', examines how the VET sector might anticipate what the future needs of employers might be and describes the difficulty of projecting the evolution of the economy. It offers an initial evaluation of the accuracy of the principal model used for skills forecasting in Australia (the MONASH model) and concludes with a discussion of how best to manage the uncertainty over the shape of future skills demand.

Summary

About the research

The vocational education and training (VET) sector seeks to teach courses that will meet future demands from employers in terms of the quantity and types of skills required. The question is how does the VET sector anticipate what these future demands might be in the context of a rapidly evolving economy.

This report is part of the larger research program, ‘A well-skilled future: Tailoring VET to the emerging labour market’.

  • The MONASH model for projecting future skills needs is of high quality by international standards, but the complexity of the economy is such that it is not possible to make accurate projections of future skill needs in any detail, or for more than a few years into the future.

  • New VET graduates play only a modest part in filling expanding skilled vacancies; other sources of supply are people who learn the required skills on the job and people who already have the required skills, but who are working in other jobs, are out of the labour force or are unemployed, or are migrants.

  • VET planners should not try to match training to projected skills needs in any precise way; they should instead focus on distinguishing skills that are in growing demand from those in declining demand, and on skills that take a long time to learn (and to gear up to teach).

  • VET planners also need to anticipate areas where there are large numbers of people with specific skills who will leave employment in the forecast period, that is, replacement demand.

Executive summary


Introduction

This report is a component of the research program, ‘A well-skilled future: Tailoring VET to the emerging labour market’. This research program examines the evolving labour market and changing work organisation and management in the context of the vocational education and training (VET) sector and its role in the development of the appropriate levels, types and quantities of skills required to satisfy the future demands of Australian industry. The research reports have been produced by a consortium of researchers from the National Institute of Labour Studies, Flinders University, and the Centre for Post-compulsory Education and Lifelong Learning of the University of Melbourne.

The VET sector seeks to teach courses that will meet future demands from employers in terms of the quantity and types of vocational skills required. If changes in the quantity and types needed by employers can be anticipated, then we can avoid the development of redundant capacity (excess people and excess capacity in teaching institutions). We can also make it easier for employers to find the skills they need, at the time when they need them, and in the places where they need them. Computer forecasting models are often used for this purpose. However, no model, no matter how carefully and cleverly constructed, can hope to remove fully the uncertainty involved in dealing with the future. This is especially so when the forecasts need to be broken down by type of skill and by region before they become useful for planning.

This study examines how economists construct their projections of future skills demand; evaluates how successful the principal models used for skills projections are; and discusses how the VET sector should respond to the unavoidable uncertainty about the shape of future skills demand.

The demand for vocational skills

The demand for vocational skills is not observed directly, but is usually inferred from the number of people who are employed in occupations deemed to require those skills. In practice, many people in higher-level occupations do not have the level of formal education designated for such work. For example, associate professionals are deemed to require diploma or advanced diploma. In practice, only one-third of people employed as associate professionals are qualified at this level or higher. Even in instances of those working as tradespersons and related workers, one-third has no post-school qualification at all.

In general, the levels of formal education of the Australian workforce are not high by Organisation for Economic Co-operation and Development (OECD) standards, but they have been rising. Younger cohorts have more education than older cohorts. The proportion of the working-age population with post-school qualifications in Australia increased from 39% to 51% over the ten years up to 2004. The proportion of those with a bachelor degree or above rose markedly, from 12% to 19% over the same period. By contrast, the proportion of people with VET qualifications (advanced diploma/diploma or below) has only increased slightly (by three percentage points).

Most of the growth in demand for skills has been for those at higher levels (that is, university degrees or diplomas). In the 18 years since 1986, total employment grew by about 40%, while employment of tradespersons and related workers grew by only about 8%. Associate professionals and professionals have been the occupations with the fastest rates of growth.

Uncertainties in demand forecasts

It is extremely difficult, in both theory and practice, to forecast how the demand for labour is going to evolve—beyond a few years into the future. Economies are complex and dynamic and are affected by many forces that cannot be predicted with any confidence. Major influences on the economy include: new technology; the macroeconomic state of the domestic economy and of the economies of trading partners; the amount of capital investment and its distribution between industries; changes in governmental policy; and the interaction of these factors. The changes in demand for skills reflect technological innovation, the strategies that industries adopt to increase productivity, and the tastes of eventual consumers. Even the best of the forecasting models do only a moderate job of projecting total output and employment for a number of years into the future. Their accuracy falls rapidly as the projection horizon extends, as the types of skills become more disaggregated, and as projections are made by region.

Despite the difficulties, many OECD economies, including Australia, have models of their economies which they use to project employment by quite disaggregated levels of skill. These models are complex, large and dynamic. The one most widely used in Australia for skills forecasting is the MONASH model, which ranks as one of the best of its kind in the world. It is difficult to evaluate the accuracy and reliability of the forecasts of such models, because such evaluations can only occur some time after the forecasts are made. Where there have been evaluations, they generally conclude that the models are of some value, but mainly as indicators of overall trends and interdependencies. When they are used to forecast the growth in occupations in any detail, they are often out by 10 or 20% within a few years. Our own comparisons of projections with outcomes for the MONASH model confirm that, over a nine-year period, its projections diverged substantially from the actual outcomes for a number of occupations. Indeed, even at the major occupational group level, the direction of change was in some cases incorrect—projecting growth when there was decline and vice versa. This inaccuracy is a reflection of the difficulty of the task.

What is to be done?

How should the VET sector decide what to teach in the light of the virtual impossibility of reliable projections of the demand for skills at the necessary level of detail for course planning?

We emphasise that the labour market is dynamic. People are constantly changing their jobs, learning new skills from their work, moving to new locations, moving in and out of the labour force, changing the number of hours per week they work. At the same time, firms are being born, growing, dying, declining, altering the size and skill set of their workforce, recruiting strategic new skills, training some of their existing staff with the additional skills they find they need. By these means, via the continuing search of employers and workers for a good match, shortages and surpluses usually sort themselves out over time. In all of this, formal vocational education has an important, but modest role to play. It is a misunderstanding of how the labour market adjusts to think that there is a direct, one-to-one relation between an expansion in output, the associated increase in skills needed to produce that extra output, and a requirement for the VET system to provide those extra skills.

Indeed, there is only a loose match between the qualifications that people have and the jobs they do. Many people have qualifications they do not utilise in their current job. Many also work in jobs for which they have no formal qualification. So it is important to appreciate that the VET sector does not need to attempt to identify every future skill vacancy and then train someone to fill it; rather, there is much to be said for focusing on what people want to study, as well as on what future employers are anticipated to need. Individuals themselves will have a feel not only for what they like and are good at, but where the future job opportunities lie. VET planners should not try to match vocational education and training to projected skills needs in any precise way; instead, at the system-wide level, VET planners should focus on distinguishing skills that are in growing demand from those in declining demand, and on skills where replacement vacancies (for example, from retirement) are likely to be large.

There is no need to put serious effort into forecasting the demand for skills that are quite quickly and easily learned. The demand for these skills can be met at the time, if the need actually eventuates. Rather than attempting to forecast, with all the attendant errors in over- or underestimating the true outcomes, it is preferable to have effective systems for rapidly identifying emerging trends and for responding to them.

At the same time, there is value in the VET sector being able to align the broad structure of its offerings with the future needs of the economy. Here, the best strategy is likely to require a combination of steps. These include the following.

  • Use the best available model of the economy to project the expected growth or decline of occupations and the volume of replacement vacancies, at a fairly broad level.

  • Check these projections against other sources of information, such as those contained in the job prospects listing compiled by the Department of Employment and Workplace Relations.

  • Confine these projections to around five years and update them regularly with the latest information.

  • Where more detail is required, retain an Australia-wide focus and disaggregate by skill level or type.

  • Where a regional labour market is important, use local information from employers’ associations, graduate destination surveys, recruitment agencies and similar sources to refine the broad projections.

  • Undertake separate, bottom-up, high-quality studies of expected skills demands for those major skills that take a long time to learn and to gear up to teach—it is for these that the ability to make accurate projections is of most importance.

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