“Firms involved in global markets tend to require higher skilled workers than firms that only serve the domestic market,” according to a study from the World Trade Organisation. The implications of the WTO report (‘Skills and Export Competitiveness for Small and Medium-Sized Enterprises’) are that businesses, especially smaller firms, are dependent on the quality of education and skills provision by a government and its agencies to provide the labour market conditions that enable firms to compete in international markets.
This analysis is supported by the British think-tank, the Centre for Cities, which concluded that when there exist high levels of skills within a local economy it attracts the most productive inward investment and does so in ways that are most effective in strengthening the local economy. This then produces clusters of high skilled businesses that are likely to co-locate, creating high productivity hubs that are less vulnerable to job displacement and offshoring.
Its report – ‘Trading Places’ – explains how exporters of both services and goods tend to have a higher knowledge base than domestically focused firms, with above average levels of skills and productivity. Unfortunately for rural areas, this means that internationally focused businesses are more likely to successfully locate within large urban areas, where the skills base is deeper. The Centre for Cities spells out that “the returns to co-location are higher for some types of firms meaning that some firms are more likely to locate in urban locations and this is true of exporters.”
At present, there is so little spare capacity within our labour market that recruiting skilled workers is a serious challenge for many Northern Ireland firms. This risks creating blockages for exporting firms in recruiting relevant skills and also for international businesses looking to invest.
A recent report from the Ulster University Economic Policy Centre explains that while employment grew in the first quarter of this year, this “was largely facilitated by migrant labour”. This process, says UUEPC, is being challenged by recently introduced stronger controls on inward migration. In terms of expanding the total labour market, the response requires a much greater focus on tackling economic inactivity – which is much higher in Northern Ireland than in the rest of the UK. Measures to address this are likely to include expanding affordable childcare provision, cutting health waiting lists and enabling more people with disabilities to re-enter the workforce.
However, many people currently economically inactive have low levels of skills and qualifications and the measures proposed by UUEPC will have limited effect in increasing the availability of higher level skills, at least in the short term.
According to the UUEPC Skills Barometer of 2021, the two skills categories with the highest deficits in Northern Ireland were in engineering and manufacturing technologies and in science and mathematics. These skills are likely to be especially important for internationally focused businesses.
A new report from the Northern Ireland Audit Office expressed concern not only about these skills gaps, but also regarding the slow progress in addressing them. Some key targets are being missed by an increasing margin. The proportion of the population with at least level 2 or 3 skills decreased in the most recently recorded year. Skills shortages vacancies were almost five times greater in 2022 than it had been in 2015 – increasing from 2,800 to 13,700 vacancies. Some 35% of all vacancies in 2022 were categorised as skills shortage vacancies.
The NIAO explained: “Nearly all employers (96%) reported that these skills shortage vacancies were having a detrimental impact on their business performance…. Furthermore, a significant proportion of employers (over 40%) also considered that the impacts of skills shortage vacancies were causing delays in developing new products or services, a loss of business to competitors, or even withdrawals from offering certain products or services altogether.”
A number of reports have stressed the need for Northern Ireland to focus more on skills development, yet these have not led to the necessary level of change. “In 2020 the Organisation for Economic Co-operation and Development (OECD) commented that developing relevant skills and using them effectively is crucial for Northern Ireland’s ability to thrive in an increasingly interconnected and rapidly changing world,” observed the NIAO.
Internationally focused employers are consequently being squeezed by the shortage of highly skilled locally available labour and UK government restrictions on the importation of workers from elsewhere. One approach is to look South. Studies from Dublin’s Economic and Social Research Institute have explained that skills levels in the Republic are generally higher than in the North.
Productivity in the South is particularly high in foreign owned businesses, reflecting both the level of investment and the skills base drawn upon. Ireland’s Central Statistics Office reports that in 2021 – the most recent figures – the foreign sector generated productivity growth of 5.5%, compared to just 1.3% from the domestic sector. In industrial sectors, the CSO reports, foreign owned firms are more than six times more productive than domestically owned businesses in Ireland.
Given the skills challenges within Northern Ireland, one partial solution might be to attract more workers from the Republic, benefiting from the stronger skills base south of the border. While pay rates tend to be higher in the South, so too are costs – especially residential. With improved rail services between Belfast and Dublin (including stops at Drogheda and Dundalk) commuting along the East coast is also becoming more practical.
A recent report (‘The North West Economic Region’) I produced for the Holywell Trust concluded that more could be done in border areas to assist the flow of workers between the two jurisdictions. While the different tax and benefits systems is a matter for national governments to resolve, other challenges should be simpler to address. One of these is the lack of partnerships and cross-border information provision by the two main investment agencies, Invest NI and IDA Ireland. There are also practical measures that could be adopted to assist commuting to work, by improving cross border public transport and roads.
The absence of simple solutions to Northern Ireland’s skills squeeze requires internationally focused businesses to consider a range of options to fill labour gaps.