How labour market conditions have changed since last year’s Index

This year’s Hays Global Skills Index (the ‘Index’) reveals that global labour market conditions have become more pressured in the last year. The average score across all 33 markets featured in the Index rose slightly from 5.3 in 2017 to 5.4 in 2018. While this appears to be a marginal change when taken as a whole, there has been considerable variation in how domestic labour markets have changed. The Overall Index score has increased for 16 countries, but decreased for 12 and stayed the same for five.

One of the biggest drivers behind the increase in this year’s average Overall Index score across all countries is talent mismatch. Almost half of the countries featured (16 of 33) saw their talent mismatch score increase, highlighted by a growing job vacancies rate or a higher rate of long-term unemployment. This indicates that the gap between the skills employers require and those that the labour force has continues to grow across the world.

The extent of talent mismatch varies, both across and within different regions. However, the largest increase in this discrepancy is seen within Europe, most notably Austria, France and Belgium, where vacancies and long-term unemployment rates have increased above pre-recession levels. This suggests that those who are unemployed do not hold the skills required for the available positions.

Outside of Europe, Mexico showed the clearest sign of a growing skills gap as the number of people who have been out of work for over a year rose. Meanwhile falling unfilled vacancies rates in Chile, and declining shares of long-term unemployment in the United States and the United Kingdom, caused these countries’ scores to fall during the period.

Increasing wage pressures relative to the period of stability prior to the recession additionally contribute toward the higher global score this year, although this picture is also mixed. Wage growth is expected to accelerate in 2018 for 21 of the 33 countries, notably in Belgium, Ireland and New Zealand, but are expected to slow, or even fall, in eight.

Wage pressures in highly-skilled industries have decreased overall this year, offsetting some of the upward pressure on the average Overall Index score across all 33 countries.

This suggests that wage gains have not been enjoyed evenly across industrial sectors, with the wage premium for working in a highly-skilled industry declining on average. In some countries, such as the Czech Republic and Poland, this is a result of accelerating wages in lower-skilled industries, alongside slower growth in higher-skilled ones. In the case of the Czech Republic, fast wage growth in hospitality and administrative and support services has helped to narrow the gap, while in Poland it has been driven by higher growth in several manufacturing sectors. In other countries such as the Netherlands and Singapore, wage growth has slowed overall but has been somewhat faster in lower-skilled industries.

A similar pattern of narrowing wage gaps are also evident between higher- and lower-skilled occupations this year. This suggests that the pressure of growing wage bills is greater for employers of lower-skilled workers to those of higher-skilled ones. The closing of occupational wage gaps is especially notable in the United States, where wage growth has accelerated for lower-skilled industries such as agriculture, production and service occupations, while falling in higher-skilled ones. Elsewhere, in places such as Sweden and Malaysia, wage growth has been flat for higher-skilled occupations such as managers, professionals and skilled technicians, while lower-skilled occupations such as craft and trade workers experienced positive growth.

Global economic outlook

Despite high-profile geopolitical issues, global economic growth is forecast to remain robust this year, although it is expected to slow in the medium-term. This expansion is expected to increase the demand for workers, all else being equal.

In April, the International Monetary Fund (IMF) forecasted global GDP growth of 3.9% in 2018 and 2019. This would be a small increase on the 3.8% increase achieved in 2017, which was the fastest rate of growth since 2011. Focussing on the 33 countries featured in the Index, economic growth is forecast by the IMF to be around 3.4% in 2018, up slightly from 3.2% in 2017.

Europe and the Middle East (EME)

Economic growth in the European and the Middle East region is forecast to remain strong this year at around 2.3%, having accelerated last year. Many European countries have entered a more mature phase of their economic recovery, with stable but robust growth rates.

The Overall score for the 19 EME countries included in the Index has increased slightly, from 5.4 in 2017 to 5.5 in 2018.

This suggests that, on average, firms are finding it more difficult to attract and retain workers in the region. However, behind the Overall Index score, there is considerable variation in movement across indicators.

Rising wages in some European countries have also put upward pressure on the region’s Overall score this year. In real terms, wage growth is forecast to be faster in 2018 than in 2017 in 16 out of the 19 EME countries. Notable acceleration in wage growth in countries including Ireland (4.5% in 2018 vs 2.2% in 2017) and Belgium (1.8% in 2018 vs -0.3% in 2017) have contributed significantly to the higher score. However, these substantial wage increases have not been seen across all European countries.

Real wages continue to fall in Portugal, while in other countries, such as Austria and the United Kingdom, wage growth has been sluggish compared to historic norms.

As well as varying across countries, wage growth rates have differed across industries and occupations. While rising wages and a growing skills gap would lead to a higher score, all things being constant, much of the pressure on the skilled labour market has been offset by narrowing wage gaps across the economy, as workers in both lower-skilled sectors and occupations have enjoyed faster wage growth than their higher-skilled counterparts. This suggests that firms looking to recruit higher-skilled workers, are facing less pressure on their wage bills relative to those firms that recruit less highly-skilled workers.

Skills mismatch is a challenge for many European countries.  This is reflected in the rise in the talent mismatch indicator score this year. This suggests that it is more difficult for employers in Europe to find and retain staff with the necessary skills. Of the 17 European countries with data on job vacancies, 16 had a rise in the rate of unfilled vacancies to employment this year.

The biggest increases were in the Czech Republic (38%), Italy (32%) and Austria (28%). On the upside, 12 of the 17 countries have experienced falling rates of long-term unemployment, which is people who have been out of work for over a year.  This has eased some of the pressure on the talent mismatch score, as long-term unemployment can lead to erosion of workers’ skills.

Asia Pacific

GDP growth rates in Asia Pacific are forecast by the IMF to slow slightly this year, but remain high at 5.2%, compared to 5.3% in 2017. As in previous years, this is predominantly driven by rapid expansion in India (7.4%) and Mainland China (6.6%). Excluding these two countries, GDP growth in the region is forecast to be more modest, at 1.9%.

Labour market participation growth rates are forecast to slow in Asia Pacific in 2018 compared to 2017, contributing to a rise in the region’s labour market participation score. Of note, participation growth is forecast to slow from 2.3% in 2017 to 0.2% in 2018 in New Zealand, while participation rates are expected to decline slightly in Singapore. Only one of the Asia Pacific countries featured in the Index, Malaysia, has a rise in growth rates forecast this year, rising to 0.7% from 0.4% last year.

Asia Pacific’s higher Overall Index score this year – 4.9 compared to 4.8 last year – indicates that employers may be finding it harder to attract and retain workers with the right skills in 2018 than in 2017. A significant driver of this increased pressure in the labour market is an increasingly evident talent mismatch. In all six countries with data available, the job vacancies rate rose last year. A rising rate of unfilled vacancies as a share of employment suggests a growing gap between the skills employers require, and those held by the labour market. This trend is supported by evidence on long-term unemployment. The share of people who have been out of work for over a year has increased in all four Asia Pacific countries with data available.

Real wage growth is also increasing pressure on the Asia Pacific labour market. Wage growth is forecast to accelerate faster than inflation this year in half of the eight Asia Pacific countries included in the Index. In particular, Malaysia’s real wage growth is forecast to rise from 2.2% to 5% this year, while wages in New Zealand are expected to grow at a pace of 2.1%, up from just 0.7% last year. Firms seeking higher-skill staff may face the greatest difficulty, as rising skill premiums have widened the region’s occupational wage gaps.

The Americas

Economies in the Americas are forecast to grow at a combined 2.8% this year. This is a notable increase on the 2.2% GDP growth achieved in 2017. All else being equal, this would be expected to mean higher demand for skilled labour in the region.

On average, the Overall Index score for the Americas is unchanged at 5.7 this year. However, behind this stable overall score, there has been movement in each of the seven indicators. The evidence suggests that pressures on the labour market have been mixed, but that overall firms are still finding it relatively difficult to attract and retain talent than prior to the recession in 2009.

However the slight downward change in the score – which was less than 1% – suggests that these pressures show signs of easing.

The decline in the wage premium firms pay for people in higher-skilled occupations has had a negative impact on the Index in the region. The greater equality in wages this year was caused by differences in wage growth between higher- and lower-skilled roles.

In contrast to the other regions featured in the Index, evidence suggests that talent mismatch is less of a problem for firms in the Americas this year.

The region’s falling indicator value has been driven by improved conditions in Chile and the United States. The job vacancies rate fell considerably in the former, while the latter has benefitted from a declining long-term unemployment rate. This suggests that employers in the Americas are having an easier time finding workers with the right skills, although the story continues to differ across countries.

In keeping with global trends, growth in labour market participation in the Americas is expected to slow this year. Participation growth rates are forecast to be lower in five of the six countries in the region this year. Notably, Canada and Mexico’s labour markets are both expected to shrink over 2018. Declining participation rates mean that firms seeking to expand may struggle, if the supply of talent fails to keep up with demand, or even contracts.

Conclusions

Examining conditions across all the countries, we find labour market conditions to be slightly more pressured this year.

This is largely due to the increasing problem of talent mismatch as well as emerging wage pressures. However, underneath the relatively stable overall scores, there is significant variation, both across and within the different regions.

In EME, wage pressures have increased overall but firms in higher-skilled industries and those employing workers in higher-skilled occupations have seen some of this pressure offset by narrowing, skill-specific wage gaps. Talent mismatch has posed the biggest challenge for Asia Pacific countries and is the main driver behind the region having the biggest score increase overall. The Americas contradict these trends with a fall in talent mismatches overall, but also face difficulty from falling – and in some cases negative – participation rates.

The analysis looked at why real wage growth in many of the labour markets within the Index has been slow in recent years compared to the years leading up to the financial crisis. At present, unemployment rates suggest there is not a large pool of unemployed workers competing for the jobs. It investigated two possible causes, namely the slow growth in productivity and the longer-term issue of the declining share of national income that workers have been receiving in recent decades.

One of the most hotly-debated issues in labour markets is the impact of AI and machine learning. This may have exerted downward pressure on labour’s share of income.

We reviewed the latest evidence on whether it will impact aggregate employment levels or lead to further hollowing out of middle-skilled jobs. Additionally, we considered how best policymakers can respond to the challenges of changing workforce composition brought about by technological change.

Given that Hays operates in 33 markets across the globe, the Index looks at important differences between labour markets. It investigates the differences in average hours worked, which are partly driven by female participation rates. It explores differences in gender equality in the workplace across countries and also examines the implications of an ageing workforce.

Skilled labour markets across the world continue to evolve. Understanding the trends that are occurring and the reasons behind them is important for business, policymakers and workers themselves. Alongside analysis and insight from our executives on the ground in the 33 markets, it is hoped the Index contributes to that understanding.