a socially desirable outcome. When it comes to anticipating and reacting to labor market vulnerabilities in response to the increase in the price of carbon, specific government policies will be important for determining each country’s ability to adapt and overcome the short-term effects of this price shock.

At the core of a society that can more easily weather a future economic shock or technological transformation is a strong system of high-quality basic education. A labor force with well-developed cognitive and non-cognitive skills will stand a better chance of withstanding an energy price shock and adjust quickly to shifting labor market conditions. Other factors being equal, countries with well-educated workers—both in terms of the quantity and the quality of education—are better equipped for this transition. In particular, education systems that deliver more years of schooling through general (as opposed to specialized vocational) education and whose students achieve higher levels of cognitive skills—like the ones measured by the Programme for International Student Assessment (PISA) — may be better positioned to take advantage of new labor market opportunities. Annex 5 shows Croatia, Czech Republic, Estonia, Hungary, Poland, Slovak Republic and Slovenia score particularly well along these indicators. On the other hand, Albania, FYR Macedonia, and Kazakhstan perform less in these dimensions compared to the rest of the region. In this latter group, improving the quality of education and its relevance for the labor market is a fundamental need.

A third area of skills development that will be crucial to fostering employment in response to a higher price of carbon is one that focuses on a broad range of non-cognitive abilities. Chief among these is the penchant for entrepreneurship among the country’s students, workers and business owners together with sense of leadership, responsibility, and problem solving capacity. Non-cognitive skills can be difficult to measure through existing national and international assessments. However, there are new measurement efforts starting in several ECA countries<sup>25</sup> that aim at assessing both the demand and the supply dimension of cognitive and non-cognitive skills. Firm surveys in Macedonia and Ukraine have found that in addition to technical skills, the lack of non-cognitive generic skills appears especially binding. Also in OECD countries and some middle-income countries, non-cognitive skills are as important as cognitive and technical skills in firms’ hiring decisions (World Bank, forthcoming).

Responding to an energy price shock, therefore, will require a combination of strong basic education systems that produce workers with portable skills, innovation policies that allow for easy adaptability of knowledge, and an environment in which individuals with key non-cognitive abilities such as entrepreneurship are rewarded (World Bank, 2011c).

Another vital area for ensuring labor market adaptability in the face of an industrial transition is the society’s scope for innovation. This concept can take many forms: from the creation of knowledge to its commercialization and acquisition from abroad to its dissemination and use.<sup>26</sup> Nevertheless, countries with advanced public and private systems of research and development (R&D) are better prepared to innovate their way toward a new industrial order. A labor force with a high degree of cognitive and noncognitive skills, paired with national systems that enable and encourage innovation, will respond more favorably in adapting to an energy price shock. It is no surprise that many businesses are born and jobs are created in places where talented well-educated individuals are matched with enabling environments and government policies that are friendly to innovation. Figure 14 shows those scoring well in these

> 25 See World Bank, 2010 for details on skills measurement. 26

> See Rodriguez (2008) for a more detailed discussion on innovation.

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