The eﬀect of regional skill gaps and skill shortages on ﬁrm productivity

This paper contributes to the literature on regional productivity, complementing previous education and skill level perspectives with a novel approach analysing the impact of regional skill gaps and skill shortages. This allows us to better reﬂect the idiosyncratic needs of the regional economic structure, considering both the demand and supply side of the skills equation in localised labour markets. Controlling for unobserved time-invariant ﬁrm-level heterogeneity and other region-industry eﬀects across a longitudinal dataset for the period 2008 - 2014, our analysis reveals a negative direct eﬀect of skill shortages on ﬁrm productivity. We further ﬁnd negative spillover eﬀects for both skill gaps and skill shortages in related industries and proximate regions. Results are also shown to be heterogeneous with respect to agglomeration levels and industrial sectors. Stronger negative eﬀects are found in industries deﬁned by a knowledge-intensive skill base pointing to the loss of learning eﬀects in the presence of skill deﬁciencies. Conversely, agglomeration eﬀects appear to moderate the impact of skill deﬁciencies through more eﬃcient matching in the local labour market. The ﬁndings presented thus suggest that policies aimed at improving productivity and addressing the increasing regional productivity divide cannot be reduced to a simple space-neutral support for higher education and skill levels but need to explicitly recognise the presence and characteristics of place-speciﬁc skills gaps and shortages. This study draws upon the Employers Skills Survey, the Annual Business Inquiry and the Business Structure Database. The Employers Skills Survey (ESS) is a representative cross-sectional survey of establishments conducted biennially covering all sectors, regions and establishment sizes above sole working proprietors conducted by the Department for Business, Energy and Industrial Strategy. The survey contains around 80,000 workplaces per wave, covering approximately four per cent of the establishments in the UK. The ESS oﬀers detailed information on the skill gaps and skill shortage vacancies experienced by ﬁrms, in addition to other key establishment information such as workplace size (number of employees), industry and region of the establishment and whether the establishment is part of a larger organization. We also collate ﬁrm-level data from the Annual Business Survey (ABS), a large survey of ﬁrms in the UK based on the Inter-Department Business Register (IDBR). The ABS contains the population of ﬁrms with more than 250 employees and a sample of ﬁrms which are smaller than this, stratiﬁed by size, region and sector. The ABS is an annual survey of businesses covering both manufacturing and service industries in the UK, accounting for about two-thirds of the UK’s whole economy in terms of Gross Value Added (GVA) 1 . It includes key information on output, employment, input materials, investments, wage costs and many other detailed ﬁrm characteristics. The ﬁnal dataset used in this work is the Business Structure Database (BSD), which holds the population of businesses in the UK. This dataset contains details on both enterprises and local units, with information on employment, turnover and foreign ownership included, as well as the age of the enterprise. The merged dataset consists of a panel of ﬁrms and their performance information observed every two years from 2008 to 2014. These four waves of our panel are obtained by matching the skill information available biennial from the ESS at the region (NUTS2) and industry (SIC2) level the ABS and BSD at the ﬁrm-level. The skill information the ESS is lagged one year ﬁrm-level information account fact deﬁciencies will likely future more performance (Frogner, 2002).