Unleashing The Skills Economy

How Governments Can Turn Labor Market Threats Into Opportunities In The Digital And Green Age

The impact of COVID-19 has not only resulted in millions of job losses but has widened skills gaps globally. Looking forward, the twin transitions - toward a greener and digitized economy - poses a far greater threat both to jobs and livelihoods. 

How can governments unleash the skills economy and turn labor market threats into opportunities in the digital and green age?

Executive Summary

Since it began in 2019, COVID-19 has resulted in millions of job losses around the world. International Labor Organisation (ILO) analysis suggests that around 8.8% of global working hours, equivalent to 255 million full-time jobs, are estimated to have been lost, with significant social and economic costs.1 Beyond the pandemic however, the seismic shifts wrought by the twin transitions - toward a greener and digitalized economy - pose a far greater threat to jobs and livelihoods globally. Estimates suggest that around 30% of jobs are at high risk of automation and this risk could be significantly higher in some countries.2

It is not all doom and gloom. While automation poses a clear risks to jobs, the digitalization of many economic activities will also create new jobs and demand for new skills. From the displacement of farming over the course of the industrial revolution, humans have adapted, created new jobs and boosted productivity. In the same manner, artificial intelligence (AI) and robotics will also create new jobs in a greener and digitized economy that will boost productivity and provide service-related employment that is harder to automate.2

Similarly, the imperative to move towards decarbonization will lead to job losses in energy and emissions-intensive sectors, but also bring opportunities in new industries ranging from sustainable energy production and storage to efficient resource use and waste management. According to our estimates, applying digital and AI solutions to the green transition could contribute up to US$5.2 trillion to the global economy by 2030, while reducing worldwide greenhouse gas (GHG) emissions by 4%.

The jobs and opportunities created by the twin transitions will require new skills. People will need to adapt to working alongside digital technologies, including AI. AI provides some promising solutions that have important implications for a greener economy. Solutions such as AI-infused clean distributed energy grids, precision agriculture, environmental monitoring and enforcement, and enhanced weather and disaster prediction and response.3 It will also call for core transversal skills, including leadership, management, creativity, communication and adaptability. These skills are likely to command a rising premium in a digitalised economy.

However, our research suggests that many countries are not ready for the twin transitions.

Firstly, skills gaps are a pervasive global problem, one that is only getting worse. PwC’s 2020 Global CEO Survey revealed that three quarters of CEOs have difficulty in finding employees with the right skills and see this as a threat to their business. “Underqualification” is one factor, another is that, although educational levels have increased in general, the skills and knowledge acquired by workers through education are often not relevant to the needs of businesses. Such mismatches have important consequences for productivity and innovation.4 Skills gaps are also widening: in Europe, skills shortages in certain high value-added sectors coexist with a growing surplus of routine and physical skills as jobs requiring these skills are increasingly automated.

Secondly, the capacity of the private sector to innovate is also unevenly distributed across countries and regions. An economy’s capacity to innovate is driven by its ability to produce knowledge, technology and creative outputs, and its capacity to absorb the supply of highly skilled workers. The Middle East and North Africa (MENA) region stands out as a region where jobs are most exposed to the threat of decarbonization, but economies do not yet have the necessary innovative capacity to absorb a highly skilled workforce into the growing sectors of the future, which is partly due to an underdeveloped, yet growing private sector.5

Despite the clear economic and social case to do so, progress in upskilling workers remains slow, and is not reaching wide segments of society. Just by closing current skills gaps, the global economy would gain at least US$6.5 trillion by 2030 via increased productivity – with wider benefits expected as an upskilled workforce continues to innovate further. But only one in three employees globally feel that they have been given the opportunity by their employer to develop the digital and transferable skills they need.6

The upskilling puzzle shows that barriers and market failures exist. For example, there is a large social externality from upskilling (economy-wide increases in productivity and innovation) that is not taken into account in individual decisions to upskill, or business decisions to encourage employee upskilling. Businesses also fear losing workers that they have invested in training. These externalities lead to underinvestment in upskilling.

Policymakers have a golden opportunity to unleash the skills economy. This is where citizens feel empowered to upskill themselves, and are enabled to do so via a well-functioning labor market and accessible training systems, and businesses have the tools to invest in innovative sectors of the economy. Both the supply and demand side need to work in tandem to achieve the successful transition to a high skills equilibrium and avoid the skills trap.7

Skills (or supply side) policies can help increase the supply of skilled workers. Governments can use skills policies through nudges, incentives and financial support, or legal and regulatory requirements (such as upskilling gap reporting) to increase upskilling. It can also improve the quality of upskilling by reducing information asymmetries and coordinating interventions by facilitating public-private collaboration, enabling employers to signal skills needs, and training providers to respond to those signals. More importantly, a comprehensive welfare policy, protecting people rather than jobs, can give people the right support and incentives to prepare for emerging jobs in new sectors, occupations, and geographies.

Demand-side policies are also needed. Successful upskilling policies will create a supply of newly-upskilled workers to meet anticipated demand in green and digital sectors. However, this is a necessary but insufficient condition to create a market for upskilled workers, as can be seen by the significant challenge of youth unemployment globally.8

Through industrial policies, governments can support the creation of good jobs to stimulate demand and catalyze the creation of a skills ecosystem. Directed technological change by government can help tilt the playing field in favour of desired societal goals, such as the creation of good quality jobs (living wage, stable employment, upskilling and training opportunities) for skilled workers that are productive and aligned with environmental objectives at the same time. Similarly, modern mission oriented approaches, as advocated by Mariana Mazzucato, Professor in the Economics of Innovation and Public Value at UCL in London, shows that a target oriented approach can be an effective way of “turning challenges into concrete problems to drive innovation”.The success of the US Moon Shot space program in the 60s shows how targets can concentrate the brightest minds.

The precise policy levers that governments use should be decided on the basis of evidence and experimentation. Nevertheless, it is clear that policies will need to be large in scale and broad in scope.

Beyond policy design and implementation, governments can also play a transformative role in unleashing the skills economy.

To unleash the skills economy, governments around the world need a strategic vision of economic development centered on skills. To put that vision into practice, governments need to embrace three enablers: Transformative Leadership, Agile Governance and Collaborative Action, captured by our framework.

Figure 1: Framework for a Skills-Centric Vision for the Economy

Transformational Leadership

To successfully operationalize this skills-centric vision of the economy, transformational leadership is required. This requires a whole-of-government approach, recognising that the policies to enable upskilling and occupational transitions go well beyond the educational sector, to include housing policy, occupational regulations, tax and social welfare schemes. Leaders also need to articulate skills strategies widely across the economy, inspiring and reassuring citizens about future transformations.

Agile Governance

In a rapidly changing world, agile governance enables policymakers to quickly adapt policy responses to meet the needs of citizens. Governments are increasingly moving away from defining “static” optimal policies that are always assumed to be correct, to “dynamic” resilient policies that leverage the latest insights and innovations to respond to the evolving economic environment. The COVID-19 Pandemic showcased the importance of agility in policymaking. Many governments in the past year have invested in centers that serve as sandboxes to gather data, test ideas and foster innovations. For instance, the United Kingdom’s Financial Conduct Authority has set up a digital-regulatory sandbox to tackle COVID-19-related challenges. This represents a shift in mindset and approach, as governments gradually follow the data and evidence that enable policy innovations.

Collaborative Action

Policies aimed at changing the mindset, behavior and actions of citizens and institutions are more successful if stakeholders, including the triple helix of universities, business and governments, are involved throughout the policy lifecycle. Governments can use their convening power to bring together:

  • Employers - to highlight their skills needs and give them a say in the design of courses and qualifications to meet their needs
  • Workers - to address their training needs and opportunities for progression
  • Skill providers - to design their offerings to meet emerging skills needs, and
  • Research and academic institutions - to use the latest research to inform policy design and implementation.

Governments should spearhead strategic collaborations, underpinned by a national skills strategy, as well as coordinate action across stakeholders to minimize fragmentation and strategic misalignment.

Uniting governments behind skill-centric visions for the economy and embracing new ways of governing will be challenging, but nonetheless achievable. We strongly believe that this is a critical element in navigating global megatrends and moving economies forward to a more sustainable and inclusive society, while ensuring good quality jobs for future generations.

Governments need to act now to unleash the skills economy.
 

1. ILO (2021), “ILO Monitor: COVID-19 and the world of work. Seventh edition. Updated estimates and analysis.”
2. PwC (2018), “Will robots really steal our jobs?”
3. Microsoft & PwC (2020), “How AI can Enable a Sustainable Future.”
4. PwC (2020), “23rd Annual Global CEO Survey: Navigating the rising tide of uncertainty.”
5. WIPO (2020), Global Innovation Index (GII 2020); INSEAD (2013), Global Talent Competitiveness Index (GTCI 2020); Malik A. & Awadallah, B., “The Economics of the Arab spring,” World Development, 45, 296–313.
6. PwC (2021), “Hopes and fears 2021.”
7. The skills trap, or the low skills trap, is characterised by a low skills equilibria, where sectors or countries experience low productivity and slow growth in real incomes. Limited demand for high skilled labor constrains the ability of firms to innovate and create more productive (and more highly-paid) employment, thus reducing the incentives for training. This in turn, creates a feedback loop as workers are disincentivised from investing in their skills due to the lack of more rewarding opportunities, which in turn, reinforces low value-adding and low-wage employment.
8. Particularly in the MENA region despite significant investments in education
9. Mazzucato, M. (2021), Mission Economy: A Moonshot Guide to Changing Capitalism, Allen Lane publishing.
 

Contact us

Randa Bahsoun

Randa Bahsoun

Labour and Social Development Leader | Government and Public Sector Partner, PwC Middle East

Tel: +971 4 304 3487

Donia Aqel

Donia Aqel

Director, Government & Public Sector and New world. New skills. Driver, PwC Middle East

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