What is missing in Australia's skills training market

The main reason employers give for experiencing difficulties in recruiting staff is a shortage of skilled people, according to the National Centre for Vocational Research (NCVER) employer surveys. It is far ahead of other reasons for recruitment difficulties such as remote location or wages considered too low or uncertain.

Employers do identify their short-term skills needs to government and can sponsor a skilled migrant on a 457 visa to fill this need. Why cannot a similar process be used by training providers and labour market intermediaries such as group training companies to supply skills from local sources?

The problem at present is that training providers such as TAFE define the demand for skills training in terms of the training individuals want to do. But most individuals lack good information about what skills employers want. So they choose instead training that appeals to them. This is even more so when they do not bear the cost of the training, funded by the government through a training entitlement.

If the demand for publicly funded training is based on uninformed student preferences, the result can be a disaster for state budgets. This is due to a big blow-out in the numbers undertaking courses not related to a reasonable prospect of employment. In today's harsh economic climate, state budgets cannot justify funding skills training unless it directly linked to helping employers to grow their businesses.

This was the Victorian Government's understandable response recently to the huge growth in skills training funded by their training entitlement for young people. The massive growth in 'lifestyle courses' such as fitness training was unrelated to identified skills shortages, leading to $400 million more expenditure than predicted.

What is wrong with the available information on skills demand?

State and federal agencies make a huge effort to try to work out what skills are needed now and in the future and to allocate public funds accordingly. However, the effort is top-down and is often wide of the mark. What is lacking is bottom-up information from employers themselves about what skills they need.

Governments need to make some effort to forecast future skills needs, but their focus has to be more for the benefit of those deciding what training to undertake than for central planning purposes. The forecasts should look at broad skills sets and trends rather than the skills needed in specific occupations as they change.

Job seekers need access to a user friendly website where they can find, in addition to required qualifications for occupations, relevant labour market information. This includes current information about occupations such as their relative size, labour turnover, wages rates, the nature of the work and the aptitudes required. Also needed is up-to-date information on who is offering relevant training programs and what employment outcomes past graduates of these program have achieved.

The need for good local information about employers' skills needs

What feedback should training providers offer on their training outcomes? The usual way to do this is for training providers to carry out a tracer survey to find out what happens to their graduates - are they in work, is it related to the skills they acquired in their training, and is their training relevant to what they are required to do in their job. These results need to be reported for specific training courses or qualifications in a local labour market so prospective students can make informed choices.

However, TAFE Institutes in Australia by and large do not carry out their own destination surveys. They rely instead on NCVER to do this with its Student Outcomes Survey. This annual survey asks former students about their employment situation, their reasons for doing the training, and its relevance to their current job. The survey sample is only large enough to provide information on student outcomes for specific TAFE Institutes every second year, due to funding constraints.

However, TAFE Institutes, despite the availability of these outcomes for their larger fields of study, do not release this information to the public. One important reason is their lack of a strong incentive to link training with employment outcomes.

Incentives for training providers to match students to skills demand

The public policy challenge is to work out how best to provide this incentive. A recent report from the UK's Social Market Foundation offers a way of doing this through performance-based funding for training providers. Specifically they propose that government pay training providers for two types of results: either (1) increase in wages of the graduate of subsidised training if currently employed or (2) employment rates for graduates of subsidised training who are not in paid work before starting their training course.

The Foundation's report Britain's Got Talent: Unlocking the demand for skillsargues that government's investment in human capital would be far more effective if training providers were 'liable for the labour market value of the skills delivered'. They contend that providers are well placed to do this because they are embedded in local economies. So it is easy for training providers to approach employers, identify their skill needs and to work out how to supply the skills they need. They can then use this information to encourage candidates to take the courses linked to local employer demand for skills. Their incentive is that at least some of their funding will be dependent on showing that the training has led to improved employment outcomes.

A government's investment in skills training can be more easily justified to the public if its link to lifting productivity can be shown in the form of existing employees's higher wages and job seekers' employment rates. This focus on outcomes will also make training providers more accountable for how well they can deliver the skills that employers value.

Training providers will have to take on some of the financial risk for delivering good labour market outcomes. This proposed arrangement is similar to the system of payment by results used by the Australian Government to allocate funding for placing job seekers in work.

The cost to government of providing good information on employment outcomes at TAFE Institute level and the incentive to do will be a small proportion of the savings to state budgets from training blow-outs.