Skills Challenges Report – New Zealand’s skill challenges over the next 10 years
This report presents the key skills challenges facing the New Zealand labour market over the medium to longer term. A well functioning labour market is one of the factors facilitating economic growth, along with other key factors such as access to capital and markets.
Strong growth forecast in the number of jobs requiring higher-level vocational qualifications
Over the next 10 years, strong growth (averaging 6 percent each year) is forecast in the demand for people with higher-level vocational qualifications across a wide range of occupations. However, despite strong growth in the number of people completing vocational qualifications over the past 10 years, the share of the workforce with these qualifications has barely changed. Over the next 10 years the number of employed people with vocational qualifications is forecast to grow by only 0.7 percent per year. This is because of four factors:
- high levels of net outflows through migration (mostly to Australia)
- people retiring are as likely to hold a vocational qualification as new entrants to the workforce
- people tend to acquire their first vocational qualification at a relatively older age, with the median age being 25 to 29 years (compared to 20 to 24 years for degree-holders), and
- the growth in vocational completions has come from a low base following the decline of vocational training from the mid-1980s to mid-1990s as the economy restructured.
This indicates that the significant employment demand for higher vocational qualifications over the next 10 years is likely to face supply constraints. Immigration is an important source of these skills, but will also face challenges to meet this demand.
Immigration is a significant component of New Zealand's labour supply. We will continue to need to target migrants who can add skills, innovation and capital to the economy, with a short period of integration towards fully utilising these attributes. These migrants will be harder to attract as ageing in the OECD increases competition for the same migrants.
Skills utilisation is essential to retaining skills in an open labour market
New Zealand needs to better utilise workforce skills, in order to make the most of the skills that are developed here and those that New Zealand attracts from overseas.
New Zealand's low level of growth in labour productivity (the amount of output produced by each hour of work) is an important indicator of, among other things, the under-utilisation of skills. While the skill levels of the New Zealand workforce are on a par with many nations in the OECD who have higher GDP per capita than New Zealand does, the application of these skills in the New Zealand workplace appears to lag behind. Disentangling the reasons for this sluggish productivity (and resultant wage growth) is challenging. Factors include the small scale of New Zealand firms, the distance from key markets, the relatively large share of workers employed in labour intensive but low productivity industries such as wholesale and retail trade, and the need to raise management capability.
While it is essential that we have high performing educational institutions that produce skills that are relevant to New Zealand, the key will be having workplaces and an economy that fully utilise these skills through providing highly productive jobs. New Zealand has a very open labour market, with inflows and outflows from migration that are typically similar in size to those coming out of the education system each year. The risks of simply focussing on the domestic supply of skills are that:
- New Zealand will continue to lose talented New Zealanders who are drawn overseas, especially to Australia, to more productive jobs and the higher wages that accompany them
- it will be harder to attract and retain skilled migrants
- New Zealand will miss the opportunity to find ways to optimise skill utilisation.
Strong service sector employment growth is forecast...
Over the next 10 years, we forecast that service sector jobs (including many high skilled jobs) will provide the bulk of the new jobs in the labour market. Some of this is a continuation of industry growth trends and some is driven by demographic change, such as the ageing population driving demand for healthcare workers. Private sector services, such as wholesale and retail trade, business and financial services and communication services are forecast to grow strongly. Manufacturing growth is expected to be muted, driven both by the lingering effects of the recession and longer-term structural changes in the industry. Slow growth is forecast for the construction industry, although this is likely to be revised when the effects of the Canterbury earthquake become clearer.
with mixed implications for productivity growth...
Many service industries, such as wholesale and retail trade and accommodation, cafes and restaurants have historically had very low levels of productivity growth. Others, such as communication services and transport and storage have had very strong productivity growth, while public service industries, such as education and health, have proved challenging to measure. Together, these service industries have employed a large share of medium and high-skilled workers. Employment in the primary sector is forecast to grow strongly, driven by strong international demand, and has historically shown very strong productivity growth, despite having a low share of workers with advanced educational qualifications.
and higher levels of qualifications required.
This pattern of industry growth is expected to require more highly skilled workers. Between 1986 and 2009 the share of the population (aged 25 to 64) with a bachelor's degree or higher more than tripled, from 6% to 22%. Demand for degree-holders is forecast to grow at an average of 1.8 percent per year over the next 10 years, almost double the forecast rate of overall employment growth (1 percent per year).
However, demand for people with higher-level vocational qualifications (certificates and diplomas at level 4 and above) is expected to grow much more strongly (6.0 percent per year).
Occupationally, the strongest employment growth is forecast for managers, professionals, and technicians and associate professionals.
Compared with most OECD countries, a high proportion of New Zealanders hold a tertiary qualification, ranking second in the OECD 2008 for the share of people aged 25 to 64 with a qualification at level 4 or above. However, measuring the qualifications 'premium' in terms of the earnings advantage for adults with tertiary level qualifications compared with those with school qualifications is challenging, and different studies produce different results. What does seem clear is that returns to tertiary education in New Zealand are similar to those in Australia, which is by far the largest residence of the New Zealand diaspora. As a result, we do not expect this to limit the incentives for young people to continue to invest in higher education. The key challenge is the higher earnings available at all levels of education in Australia and many other OECD countries.
The ageing population will constrain labour force and economic growth
As baby boomers begin to enter older age groups, New Zealand faces a significant slowdown in the labour force growth that has fuelled economic growth over the past decade or more. This will sharpen the focus on developing and utilising the existing skills of the workforce.
Strong growth in the number of degree-holders is forecast...
The number of degree-holders in the workforce is forecast to continue to grow very strongly over the next 10 years driven by two key factors:
- Young people entering the workforce today are many times more likely to hold a degree than those who are retiring from paid work and this cohort effect is continuing, despite the rate of first-time degree completions having been fairly static for some years.
- Immigration makes a very strong contribution, with the number of degree-holders moving to New Zealand each year estimated to outnumber those who leave by around 13,000.
Forecasts are at a high level
This report provides a baseline measure of the level of skills in the workforce and our best estimates for change over the medium term. These have been produced by looking at the labour market as a whole, as well as for broad occupation, industry and qualification groups and identifying key trends.
With migration flows having such a big effect on the labour market, detailed labour supply forecasts require detailed information on the occupations and qualifications of immigrants and emigrants, as well as flows between occupations. Generally this information is not available, and so the forecasts are necessarily at a high level.