Prepared by Economic Research and Policy Analysis Branch (then Micro-Economic Policy Analysis Branch), Industry Canada and Policy Research Directorate, Human Resources and Social Development Canada
April 2008
This document presents Skills Research Initiative (SRI) research and summarizes its findings and implications as discussed at SRI workshops. The report represents the views of the researchers and workshop participants and as such does not necessarily reflect the policies and opinions of Industry Canada, Human Resources and Social Development Canada or the Government of Canada.
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Table of Contents
The Skills Research Initiative (SRI, see box) is a collaborative, medium-term policy-research program sponsored by Industry Canada, Human Resources and Social Development Canada, and the Social Sciences and Humanities Research Council's Initiative for the New Economy. The SRI was established in response to concerns that the supply of skills might not be able to grow enough to support rapid growth in innovation and higher rates of productivity growth. The fundamental conclusion drawn from SRI research is that skilled labour supply is not a significant impediment to Canada's innovation performance, although there are ways in which policy could improve Canada's ability to supply skilled labour. The principal policy concern on the supply side of skills should be the performance of Canada's post-secondary education system.
SRI research investigated issues of skilled labour supply and of the adequacy of labour market adjustment to demand for skilled labour. These issues are highly relevant for current policies aimed at improving Canada's productivity and innovation performance. Advantage Canada stresses the need for "A Skilled, Educated and Adaptable Workforce". It calls for measures to address quantitative, qualitative and efficiency dimensions of labour supply. The government's strategic plan for science and technology, Mobilizing Science and Technology to Canada's Advantage, seeks a "People Advantage" created by "best-educated, most-skilled and most flexible workforce in the world".
The SRI research addresses policy-relevant issues of workforce quantity and quality and the efficiency of labour markets under four themes:
- Labour Market and Skills Implications of Population Aging in Canada
- International Mobility of Highly Skilled Workers
- Employer-supported Training in Canada
- Adjustments in Markets for Skilled Workers in Canada
Skills Research Initiative (SRI)
The Skills Research Initiative was established in 2003 by a Memorandum of Understanding between Industry Canada, Human Resources Development Canada and the Social Sciences and Humanities Research Council. The SRI sought to:
- Foster policy-relevant research on skills, organized around four themes:
- Labour market and skills implications of population aging in Canada;
- International mobility of highly skilled workers;
- Employer-supported training in Canada;
- Adjustments in markets for skilled workers in Canada.
- Encourage dialogue between researchers, policy makers, and practitioners through conferences and publications;
- Support the dissemination and application to policy of research on skills, particularly within government, in the academic community and among other stakeholders.
Three policy workshops were held in the National Capital Region in 2006: Labour Market and Skills Implications of Population Aging, International Mobility of Highly Skilled Workers, and Adjustments in Markets for Skilled Workers (which included the theme of Employer-supported Training). Following the workshops, final versions of the synthesis report for each workshop and an SRI overview report were prepared. The synthesis reports present the research results of the theme, and discuss their policy implications. The overview synthesizes the findings of all the themes and presents the broad policy implications including an overall diagnostic.
The theme "Labour Market and Skills Implications of Population Aging in Canada" was a response to concerns about the impact of workforce aging on the supply of skills. This theme included research that examined the consequences of population aging for the supply of skills to the Canadian economy and research aimed at identifying barriers to continued labour force participation of older workers.
Immigration is often seen as a possible offset to workforce aging and a low-cost source of skills. Research under the theme "International Mobility of Highly Skilled Workers" investigated the implications for the Canadian skills supply of increased temporary and permanent international mobility by highly skilled workers.
Training of workers in new skills is increasingly important in a knowledge-based economy; and with an aging workforce the importance of training as a source of new skills may increase. International comparisons suggest a lower incidence of employer-supported training in Canada than in most other advanced economies. The research theme "Employer-supported Training in Canada" examined the reasons for this apparent gap and assessed apprenticeships in Canada as a form of employer-supported training.
The ability of Canadian labour markets to supply the skills required by the knowledge-based economy depends on how well the supply of skills adjusts to shifts in the demand for skills. The research theme "Adjustments in Markets for Skilled Workers in Canada" examined three aspects of the adjustment process. First, since the predominant source of new skills in the Canadian economy will continue to be post-secondary graduates, how well does the post-secondary educational system respond to shifts in demand for skills? Second, how rapidly does adjustment occur in occupational labour markets for skilled workers in Canada? Third, can labour market information facilitate the adjustment process?
Government policies play a key role in each of the areas covered by SRI research, as illustrated by the following examples. The principal source of new skills for the economy will continue to be labour force entry by Canadian post-secondary graduates. Canadian post-secondary institutions and students receive considerable funds from governments; and governments allocate funds between different levels of the post-secondary educational system. Government policy determines who can immigrate to Canada as either a temporary or a permanent migrant and thus influences the new skills available to the economy through immigration. Government funding supports apprenticeships; and there are frequent proposals for increased government support for other forms of employer-supported training. Government policies shape the incentives and disincentives for older workers to remain in or leave the workforce, both directly, through tax policies and policies affecting governmental retirement income plans, and indirectly through policies that influence the options available to workers in private pension plans.
In the next section of this overview, the areas of research and key findings are summarized in bullet form for each of the four SRI research themes. The final section examines the policy implications of SRI research.
Areas of Research and Key Findings of SRI Research:
Labour Market and Skills Implications of Population Aging
The basic demographic facts underlying population aging had been known to policy makers for some time when the SRI was undertaken. Most of the policy research concerning population aging, however, had focused on areas such as the financing of public retirement systems and of health care expenditures. There had been little previous policy-research attention to the labour and skills implications of an aging population. Issues of policy interest in this area include the effects of smaller youth cohorts on the supply of skills, how the skills of older workers differed from those of younger workers, what barriers there were to continued participation by older workers and whether immigration could offset the effects of demographic change on the supply of skills.
Areas for research under this theme were:
- To determine how the aging workforce will affect Canada's ability to continue developing an innovative, knowledge-based economy built on a highly skilled workforce.
- To evaluate whether an aging workforce will result in higher adjustment costs for the economy and/or for individual Canadians.
- To identify barriers that prevent older Canadians from participating more in the workforce.
Key findings include:
- Immigration cannot offset population and workforce aging-the likely inflows are too small; and immigrants entering the labour force are older on average than Canadian entrants from the educational system.
- Despite a probable decrease in the global savings rate, labour is likely to become scarcer relative to capital, driving up wages.
- Incentives for youth to invest in skills will increase as a result.
- Whether these increased incentives will result in increased investment in skills depends on whether the post-secondary education system meets the demand for enrolments.
- There are significant disincentives in private retirement plans to continued work by older workers, and these disincentives often begin at age 60.
- Work disincentives in public retirement systems are much smaller in Canada than in many European countries. Canada's public retirement income systems have some incentives to stop working at age 60 and strong disincentives to working past age 65.
- The largest disincentive to continued work in Canadian public retirement systems is the Guaranteed Income Supplement claw-back (and its interaction with the Canada Pension Plan (CPP)/ Quebec Pension Plan (QPP)), which affects primarily the low skilled.
International Mobility of Highly Skilled Workers
International labour mobility is increasing; and permanent and temporary migration by highly skilled workers is becoming a key aspect of economic globalization and of the knowledge-based economy. The issues that arise from these trends go beyond short-term impacts on recruitment by employers and the transfer of human resources labelled as the "brain drain". Increased labour mobility may generate efficiency gains by helping to increase the scope of goods and services traded or by increasing private incentives for human capital investment. An understanding is needed of how policy can influence the distribution of the costs and benefits resulting from increased mobility of the highly skilled; but at the inception of the SRI there was very little information on this subject.
Areas for research under this theme were:
- Global trends in the migration of highly skilled workers and the performance of Canada in attracting highly skilled migrants.
- Identification of the fundamental drivers of increased international migration of highly skilled workers.
- Effects of international labour mobility on Canada's supply of skills.
Key findings include:
- Canada has done well compared to other countries in attracting permanent immigrants who are post-secondary graduates, but a relatively low proportion of these have doctoral degrees.
- Many immigrants with post-secondary degrees may be poorly prepared for the Canadian labour market, since their literacy skills in English or French are lower on average than those of Canadian-born persons with the same level of education. This calls into question the adequacy of a selection system for economic immigrants based on education level.
- Increased flows of temporary workers and international students are part of economic globalization.
- Canada has done less well at attracting highly skilled temporary migrants and international students than other advanced economies.
- Highly skilled workers are attracted to areas with high wage levels for their skills; a wage structure with very high rewards to "stars" may also attract the highly skilled.
- Countries can benefit through access to knowledge flows arising from temporary migration, both inward and outward.
- Temporary workers and permanent immigrants can play a role in building knowledge clusters by providing needed skills and through increasing Canada's participation in international knowledge networks.
Employer-supported Training
With smaller youth cohorts entering the labour force, training of workers already in the labour force may become increasingly important as a way of meeting new skill demands. Internationally comparable data available when the SRI was undertaken suggested lower rates of employer-supported training in Canada than in other advanced economies, in particular, the United States, raising concerns that Canadian employers might be under-investing in the skills of their employees. A better understanding was needed of the factors determining the firm's decision to train its employees (including the effects of existing policies) and of the reasons for international differences in the provision of training by firms.
Areas for research under this theme were:
- Reasons for differences between levels of employer-supported training in Canada and in other countries, especially the United States.
- Factors influencing employers' decision to provide work-related training.
- Effects of barriers and labour market imperfections on the availability of employer-supported training.
- Performance of the Canadian apprenticeship system.
Key findings include:
- Canada-U.S. differences in levels of employer-supported training are largely due to differences in workers' educational level and the industrial distribution by employment.
- New technology adoption is an important reason for employers to train.
- Government regulations (for example, on health and safety) are an important reason for training.
- Wage compression (for example, due to unionization, progressive income tax, asymmetric information) lowers training incentives and investment for high-skilled workers, but increases employer investment in training low-skilled workers.
- The Canadian apprenticeship system faces significant difficulties:
- A low completion rate, trending downwards.
- Apprenticeship is not typically a school-to-work transition.
Adjustments in Markets for Skilled Workers
The SRI arose from concerns about the ability of Canadian institutions and labour markets to adjust adequately to changes in the overall demand for skills and to changes in the composition of the demand for skills in the context of an aging population. These concerns implied a need to assess the performance of the institutions that govern the Canadian skills supply response to changes in demand, to examine the performance of Canadian markets for highly skilled workers, and to examine mechanisms for communicating knowledge of labour market conditions.
Areas for research under this theme were:
- Adjustment of markets for skilled workers.
- Post-secondary education (PSE):
- Students' response to market signals;
- Adjustment of PSE institutions to market forces.
- Labour market information and market failures.
Key findings include:
- Labour markets for skilled workers adjust well, however, full adjustment takes a number of years due to the lengthy training required to produce skilled workers.
- Students adjust to labour market signals. Potential earnings play an important role, but personal preferences and earlier academic success matter as well.
- Canadian PSE is not market-driven on the supply side. PSE institutions do not respond fully to demand by potential students in setting enrolment levels overall and by field of study.
- If PSE enrolments are restricted in the face of rising demand, the wage premium for PSE graduates over high school graduates is likely to continue to rise.
- Private and "social" rates of return to PSE are already high.
- A continued increase could indicate an undersupply of PSE graduates.
- Partial reforms in PSE in other countries have not led to differentiation in tuition between universities or across fields of study.
- Internal adjustment in firms is an important source of labour market adjustment and is heavily influenced by policy. For example, firms' ability to adjust by rehiring their own retirees is limited by regulations governing private pension plans.
- Labour market information can play a valuable role in adjustment, but it needs to be accurate, targeted, and evaluated for effectiveness.
Policy Implications
The SRI was concerned with improving our knowledge of the supply side of markets for skilled workers in Canada and of how markets for skilled workers adjust to shifts in demand. The aim was to ensure that lack of availability of skilled workers will not impede policies aiming at a more innovative, more productive economy. SRI research covered the major sources of the supply of skills, the role of institutions and markets in adjustments to changes in demand for skilled workers, demographic trends that affect labour supply and the trend to increased worldwide competition for skilled workers.
A general conclusion is that where markets are allowed to work, the supply of skilled workers in Canada responds well to market signals. Firms have incentives to train and they do train; students respond to market signals; and Canada can attract and retain skilled foreign workers. Since it takes years to train a skilled worker, however, the supply response to shifts in demand for skilled workers also requires years to complete. In the meantime market mechanisms will allocate skilled workers to their most efficient use. There is little doubt that Canada can meet its need for the skilled workers required for an innovative economy if labour market adjustments are able to operate.
SRI research does raise significant policy concerns in four areas. The first of these areas is the adjustment of the PSE system to changes in demand for skills. PSE is not a market-driven system. While potential students do respond to market signals, there is evidence that PSE institutions do not respond fully to student demand in setting enrolment levels overall, and by field of study. Increased rates of return to PSE education may indicate a need for increased enrolments, but there is no guarantee that this increase will occur unless the funding mechanisms for PSE provide incentives for PSE institutions to respond to demand. Various countries have experimented with partial reforms designed to make PSE institutions more market-driven, but these attempts seem to indicate that partial reform is not very effective. The most promising policy direction for policy may be to continue with the current trend away from subsidies to PSE institutions and towards subsidies to students (through tax credits, subsidized loans and grants).
The second area for policy concern, based on SRI research, is the removal of barriers and disincentives to continued labour force participation of older workers. Public retirement systems are not neutral with respect to the age of retirement. Capped contribution programs, such as Employment Insurance and the CPP/QPP, are a disincentive to part-time or part-year work schedules that many older workers prefer. Consideration could be given to exempting earned income from the various income tests in the tax system. Rules for income from registered retirement plans could be examined with a view to increasing flexibility for workers in these plans.
A third area for policy concern is improving the functioning of Canadian markets for skilled workers by removing barriers and disincentives to labour mobility. This includes removing the barriers credentials recognition imposes on the inter-provincial mobility of skilled workers. The recent Alberta-British Columbia agreement might serve as a model. This also includes examining programs that support low-productivity economic activities in rural and remote areas of Canada at the expense of the dynamic urban economies that are central to innovation.
The final area for policy concern is immigration policy. The selection procedures for economic immigrants need to be improved. Canada has admitted large numbers of economic immigrants with high levels of educational credentials, many of whom have low levels of English or French literacy skills and have great difficulties in finding employment that matches their credentials. Also, if the aim of economic immigration is to assist in building knowledge clusters, policies that seek to disperse highly skilled immigrants outside of major urban centers may be misguided. Finally, temporary migration of the highly skilled is of growing importance in an increasingly global economy. Admissions procedures for temporary migrants need to be streamlined.
Diagnostic — Looking Forward
Post-secondary graduates will remain the primary source of new supply of skills in the Canadian economy. Canada has a post-secondary education system which is unique among the advanced economies because of the very high percentage of community college graduates among new post-secondary graduates. This mix has been determined in large part by governmental policies, not by markets.
Compared to other advanced economies, Canada produces a low proportion of doctoral graduates. Available evidence suggests, however, that the low Ph.D. graduation rate in Canada is a supply response to low returns to advanced degrees in Canada. The relatively low proportion of immigrants with doctorates among those with post-secondary degrees is further evidence of low demand. Other evidence includes large outflows of Ph.D. graduates from Canada to the United States due to "lack of opportunities". Also, earnings growth for persons with Ph.D.s in science and engineering has been less rapid in Canada than in the United States. The lack of demand for Ph.D.s in Canada would appear to be related to a lack of demand by Canadian businesses for complementary innovative inputs (research and development, information and communications technologies, other machinery and equipment, high performance work practices and organizational strategies).
Available evidence strongly suggests that skilled labour supply is not a significant impediment to Canada's innovation performance at this moment. The priority for improving innovation performance should be policies that would facilitate business strategies centred on innovation.
The available evidence, as discussed above, nonetheless suggests areas in which Canada's ability to supply skilled labour can be improved. On the supply side of skills, the principal policy concern going forward should be how to ensure, in the absence of a market mechanism, that Canada's post-secondary education system continues to produce an adequate number of graduates at the levels needed for a knowledge-based economy.
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