significantly across firms even in the same sector because of differences in physical and intangible capital such as ICT use, modern management practices, accumulated knowledge, and other technical competencies. This perspective on technology and its associated demands for different kinds of complementary skills generates a rich menu of hypotheses for the analyses of skill deficits, skill strategies, and their impacts on firm performance, which are captured by the following four sets of equations.

- _Skill share equations_ . Given this production function, cost minimization for a given level of output yields skills demand equations for the wage share of each labor type in total payroll. In this framework, the relative shares of each labor type are related to total output, the relative (shadow) wages of each labor type, and the technology used in the firm. Given the paucity of reliable wage data on the different skill groups,<sup>24</sup> we use a closely related specification in which skills demand is expressed in terms of skill shares of the total workforce. In its empirical implementation, skill shares are related to a set of control variables for firm size (a proxy for output), sector and region, and two kinds of technology measures: firm-specific productivity attributes mentioned earlier and indicator variables for export orientation and innovation. The analyses might distinguish skills by level of educational attainment or, alternatively, by broad occupational skill categories. The coefficients of these share equations provide insights into how firms’ productivity attributes, export orientation, and innovation might affect their demand for these different types of skills.

- _Skill deficit equations_ . At any point in time, firms’ actual skills mix may diverge from their desired skills mix as reflected in the skill share equations. It may take time for actual skill mix to reach desired levels because employers have limited flexibility to replace incumbent workers with new hires who have the requisite skills.<sup>25</sup> Temporary or even persistent skill gaps can arise with constraints in the local supply of certain skills and with technology and demand shocks that increase the demand for skills. Employer assessments of whether the education and skills of their workforce are adequate and whether skill shortages pose an obstacle to the firms’ operations are used to measure the presence and severity of these skill deficits. To study their determinants, we analyze whether these skill deficit measures are related to a set of control variables for firm characteristics, actual skill mix, firm productivity attributes, and demand from exports and innovation.

- _Skill strategy equations_ . Employers may respond to identified skill deficits in different ways. The survey asked about strategies employers may be using to improve workforce

> 24 Implementing the skill share of total payroll specification of the skills demand model requires detailed wage data for each skill dimension in the firm, as well as the prevailing wage rates of different skills groups in the open labor market. The TESS did not elicit data on mean wages of the workforce by level of education; while it asked for mean wages by occupation, these data were incomplete and were not deemed reliable. The challenging data needs have prompted other researchers to rely instead on specifications using the skill shares of total labor (for example, see Almeida, 2010).

> 25 Abowd et al. (2007) exploit the availability of matched employer-employee panel data to study the responses of employers to gaps between desired and actual skills mix, using a partial adjustment model.

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