Skills in the workforce: why they matter to economies (2023)

AnteriorAmerican Growth Project Reportsfocused on relatively easy to calculate metrics. Productivity, for example, is usually defined as the amount of economic output (GDP) per worker, a relatively simple measure when you have the necessary data. In this analysis, however, we turn our attention to an equally essential but more nebulous factor in economic productivity, asking the question: How slick is the US economy?

It should come as no surprise that a workforce that possesses a large number and a wide range of skills is preferable to one that does not; the former is capable of performing more types of tasks than the latter with greater competence. However, answering the above question with any degree of precision presents numerous challenges. On the one hand, the question of what constitutes “skilled” work can be answered in various ways, depending on the context. On the other hand, measuring the qualification level of the labor force is not an easy task due, in part, to these definitional difficulties.

Furthermore, the types of skills that are best rewarded in the labor market, as well as the types that are most conducive to generating additional economic growth and productivity, are constantly changing. The ability to use generative AI cues, for example, is fast becoming a hot commodity in today's job market, even with the recent woes in the tech sector, but it was unheard of just a few years ago. On the other hand, the skills required to perform the job of a switchboard operator or typesetter were relatively high until these systems became automated, making them impractical for new generations of job seekers.

In the context of the American Growth Project, we are also interested in how skills influence economic development, as well as how different skills are distributed in our micro-economies. We explore how US regions and cities specialize in different industries, creating geographic differences in demand for certain skills. For example, a workforce with strong energy and mining skills would be a big help to the incredibly strong (and highly productive) oil and gas sector in Midland, Texas, but potentially less so in an economically heavy area like New York City. York. .

How are skills defined?

In an economic context, the term “skills” is a broad term used to refer to a variety of attributes, creating ambiguity around its definition. “Skilled labor,” however, generally refers to jobs that require a significant amount of training, education, or experience to perform. This training can come in the form of specific educational credentials (for example, doctors who require a medical degree) or less formal technical or vocational training (as in the case of coding boot camps or training and apprenticeship programs for computer machinists from numerical control). More importantly for our purposes, the general skill level of a workforce determines the tasks that the workforce can perform competently. As such, it is directly related to economic productivity; Not only do you need these skills to drive innovation, but the impact of any innovation or technological progress will be severely limited if the workforce lacks the skills to use them properly.

How are skills measured?

Although abilities have been studied extensively, there are few, if any, established methods for measuring them (due in part to the aforementioned definitional ambiguity).

Scholars have approached measuring or estimating the level of skills in the workforce in two main ways. The first uses data from employer-level surveys to assess whether employers can hire workers with the necessary skills to do a given job. The other is based more on human capital theory and estimates a skills gap as the difference between the skills offered and the skills in demand. In-demand skills can be accessed a little more easily (through job search and rotation).1or LinkedIn data) than the skills being offered. Researchers trying to estimate the amount of skills on offer in the labor market often use qualifications (eg, education levels, degree) as proxy indicators.

Each approach presents a specific set of questions. Problems with the survey approach include employer-level biases that can provide skewed views of skills needed, as well as skills present in the labor market. Furthermore, these surveys may lack important details or variables and often rely on the perceptions of individual employers. Problems with the approach of using a proxy to estimate the level of skills provided often involve concerns about the imperfections of these proxies. In particular, education may not capture technical skills or competencies that can actually be used in a job.

US Skill Levels 2023: Is There a Skills Gap?

As job markets continue to reset in the wake of the COVID-19 pandemic, many employers and commentators are toying with the idea of ​​a "skills gap." While the term can have a variety of meanings, it is generally used to refer to the idea that the specific talents and competencies employers need are not present in the hiring pool of job applicants. In essence, the skills gap can be thought of as a mismatch between supply and demand in the labor market. Subsequently, such gaps can cause economic friction and undermine productivity; employers cannot find the workers they need and job seekers find themselves inadequate for the job openings available to them.

The question of whether such a gap exists has been a hotly debated topic for several years. For those who defend its existence, the high number of vacant jobs, mainly in some sectors such as specialized trades2, is evidence that the American workforce is not qualified enough to meet the needs of employers. Several employer surveys also point to the existence of these gaps; a Wiley survey from January 2023 reveals a sharp rise in hiring managers saying they can't find workers with the skills they need for their jobs.3By contrast, a 2014 article by Peter Cappelli finds little evidence in favor of a skills gap, instead attributing skill deficiencies to overeducation (eg, too many bachelor's degrees and not enough technical degrees).4Meanwhile, an in-depth analysis by the Congressional Research Service concludes, after reviewing broad indicators, that a skills mismatch can neither be confirmed nor ruled out.5

This debate demonstrates the difficulty of identifying and measuring the skills gap, since the creation and development of skills involves such varied and interconnected aspects of the economy, particularly the education system and the level of technological innovation. Other systemic factors can also cause a disconnect between labor market supply and demand. For example, the high retirement rates of the baby boomers caused large numbers of highly-skilled and experienced workers to leave the workforce, creating a relative shortage of skilled labor.6At the same time, COVID-19 has caused some workers to reconsider their employment options (one of the main questions about our big challenge for 2023: Workforce Disrupted: Seeking the Labor Market's Next Equilibrium).7

To summarize, these skill mismatches are a likely combination of the aftereffects of an education system that is incompatible with the set of jobs available to workers, rapid technological advances that have not yet developed fully compatible training systems, and demographic and social factors that are decreasing job offer. As technological change advances, new inventions will continue to affect and change the skill sets that employers most need.

Under the Hood: A Quick Look at Skill Levels at EMAs

Our preliminary analysis of skill levels in our Greater Metropolitan Areas (EMAs) relies heavily on educational attainment as a proxy indicator, specifically, the percentage of people with a bachelor's degree or higher. While the research discussed above indicates that this is an imperfect measure, we believe it is a good starting point because, as illustrated below, it is informative of both economic growth and productivity. The map below in Figure 1 provides a broad overview of the geographic distribution of skills through a choropleth map representing the proportion of the 25-64 population with this level of education.

The proportion of the working-age population with a bachelor's or graduate degree tends to be concentrated in large coastal cities, particularly in the Northeast and Western United States, and this map is generally quite similar to ours.American Growth Projects maps the fastest growing American cities.To illustrate this point, Figure 2 plots the relationship between the proportion of the 25-64 population within each EMA with a bachelor's degree and the corresponding EMA GDP growth over the past 10 years.

The scatterplot in Figure 2 above more clearly demonstrates the impact of a skilled labor force on economic growth. While our EMAs show some variation, indicating that a bachelor's degree is not the only factor driving growth, the relationship from the graph is clear: higher levels of education are highly correlated with sustained growth. Our data results reveal that a 10 percentage point increase in the share of the working-age population with at least a bachelor's degree would increase GDP growth by almost a full percentage point per year (more specifically, 0.83 percentage points ). Putting this in perspective, during this period US GDP grew by an average of 2.1% per year.

While these results are quite powerful, it is important to keep in mind the challenges of doing this type of analysis. The close relationship between education and growth may reflect the propensity of educated people to move to these fast-growing areas, as well as the high cost of living required to live in expensive cities, which educated people are likely to be able to afford. To address part of this challenge, growth resulting from more jobs, we focused on productivity and a specific driver of economic activity: a certain share of the EMA of skilled workers in technology sectors.

Figure 3 shows the percentage of an EMA's workforce that has a bachelor's degree or higher and works in the technology industry and the corresponding EMA's productivity (measured as inflation-adjusted GDP per worker). There is a strong and significant relationship between the two variables; As an EMA increases its share of technology-skilled workers, the EMA's workforce also becomes more productive. Midland, Texas, in the upper left corner, represents a notable exception, given its specialization in oil and mining, a rare case of a productive industry that requires relatively less formal education than similar productive areas, but also an important reminder that our ability measured needs to be further refined.

In particular, this final graph is essential to understanding how skills influence economic health. As a highly productive industry, the technology sector is a prime example of how specific skill sets can drive economic development. In addition, the educational level in technology is an explicit sign of skill acquisition; While less technical degrees are no less important, it can be difficult to discern the specific skills people gain from degrees in these areas.

It also offers an important point to wrap up this initial look at skills and why they matter to economies: technological progress is often touted as a driver of economic development, but while the role of innovation is certainly important, technology it is much less useful. if the skills to use it effectively are not present in the active population. And more generally, it matters little how many positive economic features are present in an area or EMA if the population lacks the necessary skills or education to take advantage of them. Thus, skills are the crucial link that enables economic potential to be realized, creating a workforce that is ready and able to drive economic growth.

1Bureau of labor statistics.Investigation of Job Vacancies and Job Rotation.BLS.

2Qualified Industrial Crafts. (2022, February 23.)The skilled labor shortage in 2022 (and how to overcome it).

3Capranos, D. and Magda, A.J. (2023, January)Closing the skills gap.Wiley.

4Cappelli, P. (2014).Skill gaps, skill shortages, and skill mismatches: evidence for the US.NBER Working Paper No. w20382, available at SSRN:

5Donovan, S.A., Stoll, A., Bradley, DH, and Collins, B. (March 31, 2022).Skills gaps: a review of the underlying concepts and evidence.Congressional Research Service.

6Fry, R. (2020, November 9).More Baby Boomers have retired since the start of COVID-19 than ever before.Pew Research Center.

7Kenan Institute.Grand Challenge 2023: Disrupted Workforce.

  • Keywords):
  • american growth project 34
  • future of work 38
  • manpower 116
  • interrupted workforce 30


How does a more educated workforce benefit the economy? ›

An economy's productivity rises as the number of educated workers increases since skilled workers can perform tasks more efficiently.

How does Labour contribute to economic growth? ›

People provide their labor to businesses in exchange for wages, and they trade their unpaid leisure time for paid work time to make a living and to be able to purchase goods and services. Businesses, in turn, use this labor to produce goods and services demanded by consumers.

What are the benefits of economic growth? ›

High economic growth leads to increased profitability for firms, enabling more spending on research and development. This can lead to technological breakthroughs, such as improved medicine and greener technology. Also, sustained economic growth increases confidence and encourages firms to take risks and innovate.

How does education affect the economy? ›

The Relationship Between Education and Economic Growth. Decades of research confirm that increased investment in education leads to increased economic growth. This includes higher salaries for individuals, greater workforce effectiveness, and higher gross domestic product.

What are the benefits of a well educated workforce? ›

Some of the benefits of a well-educated workforce can be having highly skilled and happy employees, new and creative ideas, and even increased profits and investment. Businesses with an educated workforce are also more efficient, capable of contributing new and valuable innovations.

Why is an educated society important for a strong economy? ›

Educated people can substantially contribute to their families and society, therefore creating a stable and interesting community. People with one more year of schooling earn 10% more in many developing countries. These earnings, in turn, help to drive national economic growth.

What are the 4 factors of economic growth? ›

Economists define four factors of production: land, labor, capital and entrepreneurship. These can be considered the building blocks of an economy. How these factors are combined determines the success or failure of the outcome.

Which role do workers play in the economy? ›

In economics, workers are producers.

What is the importance of labor as an economic resource? ›

Answer and Explanation: Labor is an important economic resource, without it, all the raw materials and equipments owned by the business will be useless as there would be no one to convert these materials into useful goods, nobody would utilize the equipment as well.

What is the most important for economic growth? ›

Economic growth is driven oftentimes by consumer spending and business investment. Tax cuts and rebates are used to return money to consumers and boost spending. Deregulation relaxes the rules imposed on businesses and have been credited with creating growth but can lead to excessive risk-taking.

What are three positive effects of economic growth? ›

Some of the positive impacts include an increase in wealth/reduction in poverty, improved standards of living, health, education and infrastructure and technology.

What makes a strong economy? ›

Economic growth results when groups of people, so-called economic actors, are able to produce goods and services with increasing efficiency. To produce real productivity, an economy must have better tools and equipment, namely capital goods, and greater specialization of laborers.

How does unemployment affect the economy? ›

How Does a High Unemployment Rate Affect the Economy? A high unemployment rate affects the economy in many ways. Unemployed people tend to spend less, may accrue more debt, and unemployment may lead to higher payments from state and federal governments for things like food stamps.

Do poors benefit from economic growth? ›

If economic growth raises the income of everyone in a society in an equal proportion, then the distribution of income will not change. However, if the growth occurs without a reduction in poverty, income distribution could become unequal.

What provision should be made for economic growth? ›

Three factors can create economic growth: more capital, more labor, and better use of existing capital or labor. The growth that results from increases in capital and labor represents growth due to increases in inputs.

What are some benefits about working in the workforce? ›

Here are some advantages of working full time:
  • Steady income. Most full-time employees have fixed salaries and are paid weekly or biweekly. ...
  • Insurance. ...
  • Paid time off. ...
  • Retirement plans. ...
  • More social security benefits. ...
  • Job advancement opportunities. ...
  • Fixed schedule. ...
  • Professional training opportunities.
Nov 21, 2022

How can free education help the economy? ›

Free College Would Drive Economic Growth

This springs up the question, “Should higher education be free?” In different types of economies, as college students graduate without debt, this would give them the ability to earn, save and spend immediately, which could stimulate the economy.

How important is education in the workplace? ›

An increase of highly skilled employees who perform better is one of the main benefits of creating a work environment that centers on learning. When employees are better at their jobs, not only do they improve their skills, but they operate more safely and show others how to do the same.

What is an example of an economic benefit? ›

Net income and revenues, for example, are forms of economic benefit. Profit and net cash flow are also economic benefits. An economic benefit may also refer to a reduction in something such as a cost. For example, lower raw material or labor costs are economic benefits.

Why is a strong economy important? ›

So the citizens of a country with high GDP are likely to have high incomes and high standards of living and if GDP goes up a lot, people are likely to be earning and spending more and businesses are likely to be hiring and investing more. In other words people are likely to be feeling better off.

Why are educated people important to society? ›

It helps people become better citizens, get a better-paid job, shows the difference between good and bad. Education shows us the importance of hard work and, at the same time, helps us grow and develop. Thus, we are able to shape a better society to live in by knowing and respecting rights, laws, and regulations.

What is an example of economic growth? ›

Books, which were previously only available to a tiny elite, became available to more and more people. This is one example of how growth is possible and what economic growth is: an increase in the production of goods and services that people produce for each other.

What are the three main economic factors? ›

The factors of production in an economy are its labor, capital, and natural resources.

What are the 5 major factors of economic development? ›

Top Five Factors That Spur Economic Growth
  • Natural Resources. Natural resources are the number one factor that spurs economic growth. ...
  • Deregulation. People were meant to trade with each other. ...
  • Technology. Technology has always played a pivotal role in economic growth. ...
  • Human Resources. ...
  • Infrastructure.

Are workers an economic resource? ›

To produce a product (a good or service), a business needs resources, such as labor (i.e., workers), land (e.g., a building), equipment, cash (capital) and other resources.

Which two roles do workers play in economics? ›

in economics, which two roles do workers play? consumers & producers. businesses are necessary in order to perform which function?

How does a company contribute to the economy? ›

Attracting and growing businesses strengthens our economy providing locally-produced goods and services. Strong businesses pay taxes that go for vital services such as schools, roads, fire, and police. Businesses also provide good jobs that put money in people's pockets and allow for a higher quality of life.

What is labor economics in simple words? ›

Labor economics is the study of the labor force as an element in the process of production. The labor force comprises all those who work for gain within the labor market, whether as employees, employers, or as self-employed, but also the unemployed, who are seeking work.

What is an example of labor in economics? ›

What are some examples of labor as a factor of production? Labor is the effort that people contribute to the production of goods and services. Labor resources include the work done by the waiter who brings your food at a local restaurant as well as the engineer who designed the bus that transports you to school.

Which statement best defines economics? ›

Answer and Explanation: The correct answer is (a) Economics studies production and distribution of services and goods. This definition for "economics" is the most accurate.

How do you improve the economy of a developing country? ›

For developing economies, other issues could involve:
  1. Export oriented Development – Reduction in tariff barriers and promoting free trade as a way to improve economic development.
  2. Diversification away from agriculture to manufacturing as a way to promote economic development.
Nov 18, 2019

How does inflation affect the economy? ›

In an inflationary environment, unevenly rising prices inevitably reduce the purchasing power of some consumers, and this erosion of real income is the single biggest cost of inflation. Inflation can also distort purchasing power over time for recipients and payers of fixed interest rates.

What is business cycle in economy? ›

An economic cycle, also known as a business cycle, refers to economic fluctuations between periods of expansion and contraction. Factors such as gross domestic product (GDP), interest rates, total employment, and consumer spending can help determine the current economic cycle stage.

What are examples of economic issues? ›

Here are some examples of economic growth challenges that past participants have worked on during the program.
  • High rates of unemployment or underemployment.
  • Increasing inequality, with many not being included in the growth process.
  • High rates of poverty and low growth.
  • Volatile growth dependent on one source.

How does the economy affect poverty? ›

Economic growth reduces poverty because growth has little impact on income inequality. In the data set income inequality rises on average less than 1.0 percent a year. Since income distributions are relatively stable over time, economic growth tends to raise incomes for all members of society, including the poor.

How does economic growth reduce inequality? ›

Economic growth will reduce income inequality if: Wages of the lowest paid rise faster than the average wage. Government benefits, such as; unemployment benefits, sickness benefits and pensions are increased in line with average wages. Economic growth creates job opportunities which reduce the level of unemployment.

How we can improve our economy? ›

Lower interest rates – reduce the cost of borrowing and increase consumer spending and investment. Increased real wages – if nominal wages grow above inflation then consumers have more disposable to spend. Higher global growth – leading to increased export spending.

What are the 4 basic economic problems? ›

What to produce? How to produce? For whom to produce? What provisions (if any) are to be made for economic growth?

Why is decent work and economic growth important? ›

Economic growth should be a positive force for the whole planet. This is why we must make sure that financial progress creates decent and fulfilling jobs while not harming the environment. We must protect labour rights and once and for all put a stop to modern slavery and child labour.

What are the effects of a more educated workforce? ›

A well-educated workforce attracts companies because skilled, trained workers make businesses more competitive and productive. And when your business needs change, you'll also have access to a greater number of experienced employee candidates from which to hire.

What are the benefits of more educated population? ›

A population that is better educated has less unemployment, reduced dependence on public assistance programs, and greater tax revenue. Education also plays a key role in the reduction of crime, improved public health, and greater political and civic engagement.

How does education help reduce income inequality? ›

Schools can be places where the children of rich and poor families can become friends, and the barriers of inequality are broken down. They can challenge the rules that perpetuate economic inequality in broader society, and give young people the tools to go into the world and build more equitable societies.

How important is a well educated population to the success of a modern nation? ›

Countries with higher literacy rates also tend to be in better economic situations. With a more educated population, more employment opportunities are opened.

Why do more educated workers tend to earn more? ›

Higher educated workers earn more money because they are (theoretically) more productive than those with less education, with all other conditions held constant. An employee with higher education performs complicated tasks, including accounting and management, which play a significant role in a company's success.

Can productivity be increased by improving the education of workers? ›

The correct answer is c. productivity in a business can be increased by increasing the employee's knowledge and skills by offering them education.

What are five examples of how education can affect employment? ›

Here, we share five reasons why pursuing education can advance your career at any level.
  • 1) GAIN KNOWLEDGE. This reason may be a given. ...
  • Grow your career through education.
Feb 21, 2018

Does a more educated population lead to a stronger economy and more opportunity? ›

Education provides individuals with the knowledge and skills necessary to participate in the workforce and contribute to economic growth. A well-educated population is essential for the development of a strong and competitive economy. Education also plays a vital role in reducing poverty and promoting social mobility.

What happens when economic growth occurs? ›

Economic growth – measured as an increase of people's real income – means that the ratio between people's income and the prices of what they can buy is increasing: goods and services become more affordable, people become less poor.

How does education affect population growth? ›

The research reinforces earlier findings that the level of formal education achieved by women is, in most cases, the single most important determinant of population growth. More educated women generally have fewer children, better general health, and higher infant survival rates.

How better education can reduce poverty? ›

At its core, a quality education supports a child's developing social, emotional, cognitive, and communication skills. They also gain knowledge and skills, and often at a higher level than those who don't attend school. They can then use these skills to earn higher incomes and build successful lives.

What are the 5 reasons for income inequality? ›

Income inequality is a global issue with several causes, including historical racism, unequal land distribution, high inflation, and stagnant wages. As gaps increase thanks to crises like COVID-19, the world needs to take action in education, labor market policies, tax reforms, and higher wages.

How does education influence income? ›

Households with higher levels of education tend to have more liquid assets to withstand financial storms, diversify their savings (investments), and maintain low levels of debt relative to assets. These financial behaviors are effective strategies for building income into wealth.

How does education improve quality of life? ›

Education can also lead to more accurate health beliefs and knowledge, and thus to better lifestyle choices, but also to better skills and greater self-advocacy. Education improves skills such as literacy, develops effective habits, and may improve cognitive ability.

Does education make the world a better place? ›

The higher their education and accomplishments, the better employment options they get. People who grew up poor but educated themselves have high chances to transform their lives, thus contributing to a decrease in society's poverty rates.

What are the 4 purposes of education? ›

As you think about the four basic purposes of school: academic (intellectual), political and civic purposes, socialization, and economic purposes, what do you think? Which one (or more) do you find as primary purposes of schooling in your own personal philosophy?


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