Chronic lack of skills traps workers and firms in North

Over the last number of weeks, the issue of a border on the island of Ireland - or more importantly the lack of a border - has come to the fore in the Brexit negotiations.

One of the fringe benefits of this new-found curiosity about the Border is that it has aroused an interest in the state of the Northern Ireland economy more generally

It goes without saying that Northern Ireland will be disproportionately impacted by the Brexit process one way or another, but it would be a mistake to think that Brexit is the only cause of worry for the economy north of the Border.

On any number of measures, Northern Ireland's economy is clearly in difficulty. Productivity is the most obvious area of economic weakness and here the trend is increasingly negative.

Gross Value Added per head in Northern Ireland has never reached the UK average and is falling further behind it. In 2005 total output per person was 80.6pc of the UK average; by 2015 that had fallen to 73.8pc.

Wages underperformed the UK average in every year for which data is available and Northern Ireland is consistently ranked amongst the three lowest-paid regions of the UK. The median weekly wage in Northern Ireland was 92pc of the UK average in 2016, little changed from 91pc in 2006.

Another area where Northern Ireland falls behind is in skills and this may be where the greatest failure of policy lies. The issue has not suffered from a lack of attention; there have been many conferences, many commissioned reports and many government schemes. Unfortunately, the headline statistics in Northern Ireland remain bleak, to say the least.

In 2016, 16pc of those aged 16-64 did not have a Level One national vocational qualification (NVQ). That means less than five GCSEs at A-C grade and was double the figure of 8pc for the UK as a whole.

Productivity is directly linked to skills. A better qualified and a better trained worker will be able to produce more with the same resources than an unskilled worker.

So it is logical enough to draw a line from Northern Ireland's low skills base to its poor productivity. Similarly, a lack of workforce skills goes much of the way to explaining the chronic underperformance of pay.

However, it would be a mistake to focus solely on the level of skills attainment by workers. This is only half of the problem. Clearly, there is a problem with the supply of skills but much less attention has been given to the demand.

In most cases people will seek to acquire new skills in the hope that they will be rewarded with higher wages. The supply of skills in the labour market is directly linked to what people perceive the demand for skills to be.

Firms will demand skilled workers if they are planning on investing in new technology or research and development. But firms that want to move up the value chain can only do so if the skills that they require for this are available in the labour market and are engaged in low value-added production because they do not feel there is a sufficient skills base to grow from.

In an ideal labour market, the signals of supply and demand are clear and will ensure that the appropriate amount of skills is provided. However, in Northern Ireland it would appear that this has broken down.

Northern Ireland is in essence trapped in a low productivity, low wage and low skilled dynamic. In the Nevin Economic Research Institute Quarterly Economic Observer, launched on Tuesday, we look at the idea of a Low Skills Equilibrium in Northern Ireland - a situation where a lack of supply and a lack of demand for skills mutually reinforce each other.

Workers do not invest in skills because they do not feel that they will be rewarded with higher wages or better paid jobs. This in turn means that firms do not have access to a skilled workforce and do not invest in innovation. Companies can then only offer low-skilled, low-paid jobs. Workers therefore have no incentive to change their original decisions. It is a vicious circle.

It is difficult to capture a low-skills equilibrium in any one single measure but the available data does provide some interesting insights. Despite the comparatively low skills base, there appears to be no mismatch between the skills of the workforce and those required by employers. On the contrary; the North has the lowest rate of skills mismatch of any OECD economy. Only 9pc of workers do not have the level of skills required for their job.

Very few workers in Northern Ireland reported taking part in training in the last year, and of those that did undertake training of some kind, very few did so for job-related reasons. Workers in Northern Ireland are also found to be significantly less likely to identify training opportunities irrespective of whether they actually take part in them or not.

For firms, the data is equally stark. They are significantly less likely than those in the UK as a whole to have skills shortages or vacancies that cannot be filled due to lack of skills.

Firms are more likely to have trouble retaining staff because of a lack of opportunities for career progression within the firm than because of competition from other employers. They lack systems in place to identify talent and are found to be focused more on purely price competition.

It would appear from these data that workers have little incentive to improve their skills and firms have little appetite for investment, Because these two positions are well-matched, nothing is likely to change.

In order to break out of this skills trap, policy must be focused equally on boosting supply and demand. It is no use launching another programme of upskilling, assisting people to gain skills that will ultimately get them no further in their careers.

Likewise, there is no point lecturing firms about the need to scale up and invest, if the labour market cannot provide the skilled workforce such an effort requires.

The solution to a low skills equilibrium is co-ordination. There needs to be a mechanism whereby firms are incentivised toward investment in innovation and workers are incentivised toward investment in skills. Both of these actions need to happen in tandem.

The UK does not do co-ordination well. Decades of deregulation mean that it does not have the institutional levers to effect this kind of change in the labour market. It also probably goes much of the way towards explaining how Northern Ireland ended up in this situation.

Breaking out of this vicious cycle of low productivity and low skills will therefore require a departure from current economic policy. It can start small, focusing on one industry and a few firms, but a framework needs to be found whereby firms and workers embark on investment together.

Brexit is going to be a mammoth challenge for the Northern Ireland economy, and it is not starting from a position of strength.

• Paul Mac Flynn is senior economist with the Nevin Economic Research Institute in Belfast

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