In 1776, the political economist Adam Smith wrote in The Wealth of Nations: ‘The greater part of what is taught in schools and universities… does not seem to be the proper preparation for that of business.’

Some 231 years later in 2007, the Sector Skills Almanac notes: ‘There is a shortage of basic and employability skills, vocational and technical skills, and intermediate and higher-level skills are more plentiful in the workforces of other countries.’

It seems some things never change. But while talk of skills shortages, brain drains and talent wars persists, the UK economy continues to grow steadily. So how real is the skills shortage? And if there is one, what can be done about it?

Skim through the 154 pages of the Leitch Review of Skills, published in December 2006, and it is not difficult to find some depressing skills-related facts. By 2020, even allowing for some improvement, one million people in the UK will lack functional literacy skills and six million will lack functional numeracy skills. The UK will be ranked 15th out of the 30 OECD countries in terms of low-level skills, with 11% of over-25s lacking the equivalent of a basic school-leaving qualification.

‘We are pretty convinced that there is a skills shortage, certainly our members tell us so, both anecdotally and in our annual employment trends survey,’ says Louise Morgan, a policy adviser at the CBI. ‘In our survey there is a question about skills shortages and about 30% of the employers talked about a shortfall in skilled labour having a serious impact on their business in terms of competitiveness.’

Educational holes

‘Skills’ is a broad term. According to the Leitch Review they are ‘capabilities and expertise in a particular occupation or activity’. Equally the ‘skills shortage’ is not necessarily just about the most obvious type of shortage: not having enough people in the employment market with the necessary technical skills. ‘You have to be careful what you mean by skills shortage,’ says Mike Campbell, director of development at the Sector Skills Development Agency. He believes ‘skills gaps’ among existing staff are a more pressing problem. ‘In terms of recruitment, inadequately qualified or skilled employees are actually not a big issue in Britain.’

Some sectors do face skills shortages of this kind, however. The sectors with skills-shortage vacancies are identified and ranked in the Sector Skills Almanac. Top of the list is construction, with other categories high up the ranking including ‘computer and related activities’, ‘wood, pulp and paper products’, and ‘basic metals and fabricated metal products’.

The CBI identifies further sectors such as the medical profession, teachers, scientists and engineers where there are shortages. ‘Some research predicts that 2.4 million new jobs are going to appear by 2014, and 730,000 of those are going to be in those sorts of sectors,’ says Morgan. ‘Our members are telling us that increasingly they have to look abroad because they can’t find sufficient numbers of graduates in these areas.’

She suggests that skills shortages in science can be traced back to what is happening in schools, with fewer people doing these subjects at A-level or going on to take degrees in them. There are a number of possible reasons, one being the lack of a sufficiently stretching curriculum so that students don’t feel adequately prepared to take the next step. For example, many schools offer ‘double award science’: the combined study of biology, chemistry and physics leading to two GCSEs, which is possibly less taxing than studying three separate sciences. Another factor is the shortage of specialist teachers. According to Morgan, about 25% of schools teaching 11- to 16-year-olds do not have a specialist physics teacher.

Mind the gap

There may be a more urgent problem than the skills shortage, however. ‘A far bigger issue is what are called skills gaps,’ says Campbell. ‘This is where people are already employed but company managers think that their staff are not up to the job – not sufficiently proficient. Quantitatively it is a more significant issue than skills shortages. There are roughly 140,000 skills-shortage vacancies in England. Skills gaps are about eight times that – about one million.’

That companies are saying their employees are ‘not fully proficient’ – that the people they hired are not as good as they would like them to be – places much of the responsibility for dealing with the problem in the hands of employers. If they fail to train and recruit effectively this can have severe knock-on effects for the business. ‘Firms may change what they do because they cannot get the people they want,’ he says. ‘It’s called the low-skills equilibrium. It is a kind of adaptive response by companies, which makes the problem worse.’

The low-skills equilibrium has a big impact on productivity and competitiveness. Firms pull back from entering new markets, opening new branches and expanding abroad. ‘Firms say we had better not move upmarket, not introduce that new technology, because we really are having difficulty getting software designers, or people who are very good numerically, or customer service skilled people,’ says Campbell.

An ageing population and low birth rate compound these kinds of problem. The Leitch Review reports that the under-35 workforce is static or falling in the UK and the rest of Europe. This means that employers will be recruiting from a shrinking pool of talent. In many sectors this means they will be forced to diversify their workforce in terms of its mix of men and women, ethnic groups and age.

‘In many sectors companies are not recruiting from the whole of the talent pool. They could have a more innovative approach to recruitment practices, a more innovative approach to developing and retaining their workforce,’ says Campbell. ‘The composition of the workforce in some sectors has a particularly low proportion of black and minority ethnic groups or concentrations of either young or older workers, for example.’ He cites the hospitality industry, which is dominated by younger employees with a very high labour turnover. Yet there is no apparent reason why it could not employ older workers more often.

It is not just about considering other demographic profiles for workers, but also about how you reach a particular layer of potential employees. ‘The internet is one tool that companies can use as part of an innovative talent-sourcing strategy to tap into a generation of reluctant retirees,’ says Helen Rosethorn, chief executive of Bernard Hodes Group UK, talent management and executive search specialists. ‘Take YourEncore, an open network that Procter & Gamble helped to set up with pharma firm Eli Lilly. The network connects member companies to a database of well over a thousand high-performing retired scientists and engineers from over 600 companies.’

Hire not retire

 The flip side of this is retention. Rosethorn points out that several companies also offer phased retirement programmes, the key being to acknowledge that retirees may still want a role that stretches them. According to a CareerBuilder survey released in January, three out of every ten employers in the UK plan to hire retirees from other companies, or provide incentives for workers approaching retirement age to stay with the company longer.

The issue is not just one of innovative sourcing of employees, however. Some 75% of the 2020 workforce is already in work today. Combine that statistic with the huge skills gap and it is clear that organisations must make sure the people already in work contribute as effectively as possible, and that they focus training, development, qualifications and skill-enhancement activities on them. As the Leitch Review puts it: ‘As the global economy changes and working lives lengthen with population ageing, adults will increasingly need to update their skills in the workforce.’

Morgan agrees: ‘We need a culture of learning, accredited learning possibly, with in-house training towards a qualification: you do three or four modules with your employer, which you can then top up at college or university,’ she says. The good news is that employers are investing heavily in improving their staff’s skills. The National Employers Skills Survey shows that UK employers spend £33.3 billion on training.

Whether or not you get training, however, may depend on the size of the company. Only 43% of firms with five or fewer employees report training activity over the previous 12 months, compared with 64% of firms with over 25 staff.

Initiatives such as the Train to Gain service provided by the Learning & Skills Council are coming to the aid of small companies that cannot afford to send their staff on courses. ‘Train to Gain was introduced last year and is going to be expanded massively,’ says Campbell. ‘It is a service to employees offered through independent brokers to help meet the skills needs of companies and source certain types of training and development for free – or if not for free, to obtain advice and possibly help with some of the costs.’

Soft skills such as communication are an important part of the skills mix, and attention is needed here too. ‘The e-communication revolution has put additional strain on workplace skills when it comes to the use of some of the softer people tools,’ says Paolo Moscuzza at ER Consultants, specialists in bringing about behavioural change in organisations. ‘So much information is transferred virtually these days that important conversations, best undertaken face-to-face, are simply not taking place. As a result, communication skills gaps are an increasing issue for employers.’

With a diminishing pool of talent, companies need to attend to their talent pipeline throughout the organisation. ‘A key component of a talent-management strategy is a focus on critical talent: those individuals in the organisation that make a difference,’ says Rosethorn. ‘That critical talent is no longer just graduate hires, but covers a range of talent segments required in the organisation.’

Getting engaged

Ensuring that people are adequately equipped with the skills to perform their job is essential, but so too is ensuring that the key talent stays in the organisation. A big part of this is what HR professionals call ‘engagement’ – the level to which people feel involved with their organisation. An employee who is engaged in the workplace will put in more hours, work harder and do what it takes to make the company a success. Disengaged employees are likely to leave. Unfortunately, according to global consulting firm BlessingWhite’s 2006 Employee Engagement Report, only 18% of employees surveyed were fully engaged in their work.

Best Companies, which compiles the ‘Best Companies to Work For’ list for The Sunday Times, has surveyed 250,000 people in the UK workforce in more than a thousand organisations and produced a list of eight factors with the most bearing on workplace engagement. These include leadership, wellbeing, management and team relationships. They also include whether a person believes they have the right opportunities for personal growth.

Rosethorn cites the talent-spotting initiative introduced by Tesco in 2002 as an example of good practice. The company has 367,000 employees worldwide working at over 2,300 stores and is looking to hire 11,000 people in 2007, including some 150 graduates. ‘As part of the talent management programme, employees have a performance review and a personal career plan with objectives set annually,’ she says. ‘Last year about ten per cent of the workforce was targeted for training and promotion.’

Looking to 2020 and beyond, employers have little choice but to face up to the challenges of skills gaps and shortfalls, says Campbell, and the sooner they do so the better. ‘Business needs to step up to the mark, it has to take human capital management much more seriously.’

He believes the role of management and leadership will be fundamental: ‘It is not just a human resource issue, it is not just the skills issue, it is about the way the company is managed, the way recruitment, training and development are managed, how business strategies are structured, organisations’ priorities for development. Ultimately, it is a leadership question.’