This research note aims to provide the Government of Canada some gratuitous advice on the focus for Employment and Social Development Canada’s Future Skills Centre.
The Centre is set to expend $227 million tax dollars on improving our understanding of the emerging skill needs of the economy. To achieve its stated goals, it needs to maintain a balanced focus that includes understanding the determinants of current and emerging skill supply, understanding the demand for skill and how it is evolving and the efficiency of the markets for skill that mediate skill supply and demand.
This investment is sorely needed. Our analysis suggests that the relative importance of human capital – what workers know and can apply to productive ends – as a determinant of our economic success has increased rapidly as the emergence of global markets for capital and advanced production technology erode our comparative advantage in these areas.
Concomitantly, the rapid diffusion of digital technologies throughout the economy is increasing the relative importance of human capital to productivity and GDP growth rates and reducing the demand for jobs that only demand the routine application of procedural knowledge.
Human capital is a complex concept that includes technical skills and knowledge and the cognitive and social emotional skills and knowledge needed to acquire, and apply, technical skills and knowledge efficiently and effectively.
Our analysis – illustrated in the following chart – suggests that the demand for key cognitive skills – most notably literacy and numeracy – is rising very rapidly in response to the aforementioned shifts in the terms of trade.
As documented in Chart 2, the rapid increase in the demand for literacy skills has driven an extraordinarily rapid increase in the wage premium accruing to higher levels of literacy skill. This increase opens the ways to much higher levels of skill-based inequality than we have seen previously.
Our analysis suggests that the emerging wage premia to literacy skill are too large to be attributed solely to the positive impact that literacy skill has on productivity. More directly, some of the observed growth in the wage premia to literacy skill reflects wage inflation associated with a shortage of workers with advanced literacy and numeracy skills.
A clear policy implication is that the supply of advanced literacy and numeracy skill needs to be increased rapidly.
Increasing the supply of literacy and numeracy skill involves increasing the average skill level of four groups of workers:
- Youth leaving the secondary and post-secondary education systems
- Unemployed workers
- Employed workers
The demand for literacy and numeracy skill upgrading is growing due to the fact that the supply of these skills is falling even though average years of education have been rising rapidly. At the population level, 15- to 65-year-olds lost an average of seven points between 2003 and 2012, a loss that is associated with a staggeringly large loss of economic output. Our analysis traces the observed skill loss to the fact that a significant number of adult workers work in jobs that demand very little cognitive skill use.
Research suggests that this skill loss is an unexpected result of two factors.
First, high levels of mismatch between the notional literacy demands of jobs and the skill levels of workers in those jobs means that a large proportion of workers – 30% – have literacy skill levels above the level demanded by their job. These workers tend to lose skill as a result of low skill use on the job. This loss of skill represents a significant loss of economic output for skills that we, the taxpayers, already paid dearly to create. The implication for policy is for government to create credentials that provide a reliable indication of skill that can be used by employers in recruitment, selection and promotion processes. Employers could also realize significant productivity gains by increasing the level of skill use demanded by their jobs.
Second, a significant proportion of employers appear to be reducing the level of cognitive skills demanded by the jobs in response to the fact that an estimated 40% of workers have literacy skill levels below the proficiency level demanded by their job. Employers adopting this tactic seem to be unwilling, or unable, to pay the wage premium for workers with the literacy level demanded by their jobs.
This misfit reduces the average wage rates and incomes of these workers. It also reduces their productivity.
A reasonable policy response would be to employers and governments to invest in skill upgrading and for employers to ensure that their work processes, production technologies and work organization make full use of the newly created skill supply. Without this latter condition any new skill supply will evaporate as quickly as it was created through a lack of use. Government could also encourage employers to adopt more efficient recruitment processes that actually assess the full range of occupationally-relevant skills.
At a higher level, any policies that serve to improve the skill quality and homogeneity being produced by the education system and that improve the fit between the skill demands of jobs and worker skills will yield significant improvements in Canada’s economic potential. We believe the Centre should adopt a balanced approach to skill development, one that includes measures to:
- Increase the skill supply of key cognitive skills,
- Improve the efficiency of the markets that match skill supply and demand and skill supply
- Increase the level of cognitive skills used in work to one that requires non-routine problem solving and critical thinking
Our analysis also identifies three more subtle, but crucially important, insights into the policy issues upon which the Centre will focus.
First, the Centre will need to resist the call to focus on the creation of the so-called 21st Century skills – creativity and innovation, critical thinking and problem solving, communication and collaboration. There is little doubt that these skills are crucially important to Canada’s future economic success. There is even less doubt, however, that fully 50% of adult Canadians lack the literacy and numeracy skill needed to acquire advanced levels of these skills efficiently. Providing adults with advanced literacy and numeracy skills is a necessary precondition to increasing the supply of these higher order skills.
Second, even if adults acquire a supply of 21st Century skills our research suggests that they need advanced levels of literacy and numeracy to apply them to a level that allows them to compete with advanced Artificial Intelligence systems.
The same arguments can be made with respect to STEM skills – the skills and knowledge that are the interdisciplinary integration of the formerly discrete disciplines of science, mathematics, engineering and technology. At a more detailed level, STEM includes the integration of seven distinct skill domains:
- Intellectual Curiosity
- Data-Driven Decision-Making
As for 21st Century skills, both the acquisition and application of STEM skills to the level needed to remain competitive in global markets depend critically upon both learners and workers having advanced language, literacy and numeracy skills. Without these advanced levels of key enabling skills, workers will be unable to match the productivity levels offered by advanced digitally-assisted production technologies. The loss of jobs that only require the application of routine procedural knowledge will be offset by a growth of jobs demanding higher levels of cognitive processing, but only if the workforce possesses the requisite levels of advanced literacy and numeracy skill.
At a more general level, the Centre will have to pay close attention to the dependencies among skills, in both acquisition and application, and the efficiencies of the markets that match skills to jobs if investments in creating new skill supply are to yield the expected level of individual and collective economic benefits.
Third, more subtly, there is a need to realize rapid increases in the mastery levels of the workforce. Machines make far fewer mistakes than humans yet the institutions that grant credentials often issue them to anyone mastering as little as 60% of the associated syllabus. Similarly, the data systems that monitor the supply of key skills assign people to proficiency levels using a 62.5% mastery standard, well below that achieved by even the simplest of automated processes. Given that skill-based errors cost employers, any machine/human differences in mastery levels will translate into higher levels of job loss and displacement.
In closing, it is worth reiterating several points that bear on the work and focus of the Centre.
First, there will be a need to engage adult populations in skill upgrading. Current cohorts of youth leaving the secondary and post secondary system are simply too small to have a material impact on the supply of key skills in the short run no matter what their skill levels.
Second, there is a need to learn much more about employers’ decision processes that impact skill demand and the magnitude and type of incentives that might be needed to induce them to become more knowledge and skill intense. Too many employers are choosing the low skill/low productivity route.
Third, the available macro-economic research suggests that the proportions of workers with low literacy and numeracy skill have a much greater impact on long term rates of labour productivity and GDP growth than the skilled end of the distribution. Governments should avoid the trap of pouring additional money into the post-secondary system in the false belief that this alone will precipitate higher rates of growth. More prosaically, more PhD’s and coders are not the answer to the skill needs of our economy.
Finally, there is a need for the Centre to move quickly to achieve higher rates of adjustment to the realities of the new skill-based economy. Employers have very little sense of the nature of the problem they are facing and how they should adjust. Without more rapid adjustment employment levels, incomes and government revenues will fall. There is a role for role for government in this and the Future Skills Centre can play an important part in funding a program of work that is designed to answer key questions in a systematic way. As advocated by some, funding a Stat Can employer survey here, and a SSHRC research thread there, is not the solution. To paraphrase Alex Usher, ignoring skills risks stagnation and ruin.
Interested readers may contact the author at:
DataAngel Policy Research Incorporated
1 Patterson Avenue
Canada K1P 1X9
Mobile: +1 613 240 8433
 The analysis in charts 1 and 2 is drawn from a Canada West Foundation report Canada’s need for a new approach to affordable, efficient literacy skills training, 2018 (in press)
 By our estimates literacy skill loss translates in a minimum annual loss of $34 billion in lost output
 See Literacy in Canada: Trends in skill supply and skill demand, skill shortages and surpluses and skill loss, Council of Ministers of Education Canada 2018 (in press)
 See, for example, Vametric’s Valid-8 system http://www.vametric.com