Skills Inadequacy and Thailand Competitiveness Seminar on Sustainable Growth, Regional Balance and Social Development for Poverty Reduction in Thailand Bangkok, October 26, 2006 Skills Inadequacy and Thailand Competitiveness Albert G. Zeufack, Ph.D. The World Bank

Key Messages Irrespective of size, ownership structure, industry or location, Thai firms identify Skills deficiencies as one of their three most binding constraints (PICS, 2005). Probing deeper, we find compelling evidence of failure in the market for skills in Thailand. First, a serious mismatch in skills is empirically supported from both the perspectives of employers and employees; Second, the incidence and intensity of hard-to-fill vacancies, the most used indicator of skills shortages, are far greater in the manufacturing sector of Thailand than in most benchmark countries. Third, firms pay large wage premiums to college graduates and workers with advanced technical skills, indicating high levels of excess demand for labor with these qualifications. The Cost for Thailand Competitiveness is significant: Skills shortages cost in average 15% of sales to Thai firms; Firms seems to be coping for poor quality education by providing significant levels of training to workers; English and ICT are skills workers lack the most in Manufacturing; Skills shortages affect and ICT use and performance and Technological capabilities of Thai firms.

The PICS Survey The Thailand Productivity and Investment Climate Survey (PICS) is a rich dataset particularly suited to the analysis of skills issues. Conducted between March 2004 and February 2005, the PICS covered 1385 establishments in Manufacturing, 100 in ICT and around 14,000 workers. The survey included interviews with CEOs, Human Resource Managers, and workers. Employers were asked about their experience in filling vacancies and their experience with deficiencies in the quality of their existing workforce. The worker survey provides information on the demand-side of the labor market and individual–specific information needed to properly assess the shortage or mismatch of skills in Thailand. Employees were asked independently about the skills they lack most in doing their jobs as well as about the adequacy of their field of education as it relates to the work they do.

Disentangling Skills Inadequacy Skills mismatch refers to a situation where existing staff in firms, with the required level of education, do not have the skills they need to do their job effectively (Quality). Skills shortage occurs when there are not enough workers available in the labor market to fill positions that are available in firms (Quantity).

Structure of the Presentation I. Evidence of Skills Mismatch II. Evidence of Skills Shortage III. Impact on Thailand’s Competitiveness IV. Skills Development V. The Way Forward

I. Evidence of Skills Mismatch Employers and Employees’ perspectives

Employers’ Perspective on Skills Mismatch

Workers’ Perspective The Education Skills Mismatch in Thailand

English Skills in High Demand

English Language and ICT Skills are the skills the worker lack the most in Thailand, with significant impact on wages

An issue with quality… Thai Secondary Education Students score lower than average in International Tests

Areas of Specialization Required of Engineers (unit %) Country 1 2 3 4 5 Thailand Mechanical engineering Electric and electronic engineering Metallurgical engineering Material engineering Other 53.8 35.4 32.8 30.3 17.9 Malaysia 50.9 42.4 20.0 18.8 Singapore Information technology 44.3 43.2 31.8 14.8 13.6 Indonesia Material engineering 49.7 34.2 26.2 25.5 20.8 Philippines Industrial engineering 64.5 43.6 27.9 22.7 19.8 Vietnam 58.5 41.5 24.4 22.0 20.7 India 73.8 44.6 33.8 30.8 27.7 Source: JETRO report, “Actual Management Conditions of Japanese Manufacturing Industry in Asia,” released March 2006

II. Evidence of Skills Shortage

Hard-To-Fill Vacancies of Professionals

Hard-To-Fill Vacancies of Skilled Production Workers

Time To Fill Vacancies

Causes of Vacancies

Thailand has a Large Deficit in Secondary Education: Completion Rates 1980, 1990, 2000

Scientists and Engineers in R&D (Per Million People)

A Cross-Country perspective on Skills Shortage in 2006 Difficulty in Hiring Workers Needed (unit percentage) Area Country Difficulty in recruitment of local staffs (general workers) Difficulty in recruitment of local staffs (middle management) Difficulty in recruitment of local staffs (engineers) Total 13.4 39.0 38.6 ASEAN (Subtotal) 13.7 39.8 39.6 Thailand 24.6 43.2 53.3 Malaysia 17.8 36.1 37.9 Singapore 19.1 29.8 27.7 Indonesia 3.9 37.4 Philippines 3.3 38.1 37.6 Vietnam 14.5 59.0 50.6 India 8.2 26.2 Source: JETRO report, “Actual Management Conditions of Japanese Manufacturing Industry in Asia,” released March 2006

Note: figures for “ Senior High School Graduate or Higher” includes those for “University Graduate or Higher. Statistics are from 2004 for Malaysia and the Philippines; and 2005 for Thailand, Indonesia and Vietnam. Source: Statistics released by each country

Note: Statistics are from 2000 for India; 2004 for Indonesia, Philippines, Singapore and China; and 2005 for Malaysia, Thailand and Vietnam.. Source: Statistics released by each country (except India from ADB)

Note: Statistics are from 2002 for Philippines; 2004 for Thailand , Singapore, and China; and 2005 estimates for India. Source: Statistics released by each country (for India from NACCCOM)

III. Impact on Firm’ Competitiveness

Skills deficiencies Impose a Significant Cost to Thailand Competitiveness Estimates of Benefits from Relaxing Skills Shortages If firms increased their skill intensity to optimal skill mix in industry benefits would be large, on average 15% of sales Larger benefits from relaxing skills shortages occur in industries where vacancies for professionals take longer to fill (i.e., where skill shortages are more binding)

Benefits from relaxing skills shortages are larger in industries where time needed to fill vacancy for professional is longer

Shortages Translate into very High Returns to Schooling, especially to Tertiary Education Note: The percentage increase in wages associated with a dummy variable coefficient is calculated as exp(β) − 1. Coefficients come from the regressions in Table 3.1. Source: Thailand Productivity and Investment Climate Survey 2004. Author's calculations.

…And the gap between wage premiums for Tertiary and secondary Education Graduates has been high for the past 15 Years Real Monthly Wages by Education of Monthly Wage Earners 1991 – 2004 (LFS)

Estimated Returns to High School Diplomas and College Degrees in Malaysia and Thailand Selected Worker Characteristics [Dependent Variable: individual log hourly wage] Note: Robust standard errors are denoted in parentheses. Coefficients are estimated using ordinary least squares. * denotes significance at 5% level; ** denotes significance at 1% level. Source: Malaysia Productivity and Investment Climate Survey 2002; Thailand Productivity and Investment Climate Survey 2004. Authors’ calculations.

Inadequate IT Skills Impacts Firm Performance 45% of manufacturing firms rated the IT skills of their skilled production workers as “very poor.” Thai firms perceive, lack of knowledge, availability of trained IT personnel and experienced consultants to be major constraints in adopting ICTs. The constraint is more severe for Small firms.

IV. Skills Development

Training Incidence is High

… And Returns to Training are Substantial Workers with basic IT skills (e.g. printing invoices), intermediate (e.g. word processing, email), and advanced (e.g. programming) computer skills earn 9.9, 18.9, and 29.2 percent higher wages, respectively, than those with no computer skills. Workers who lack English proficiency in doing their jobs earn 2.6 percent lower wages than those with sufficient English skills. Workers who have received formal training from their current employers in the areas of marketing and management/quality technologies earn 12.7 and 4.6 percent higher wages, respectively, than those who have not received any training from these current employers.

Returns to Training (2) Workers who received training from their previous employer have 4.9 percent higher wages than those who did not receive training from their previous employer. The return to outside training is not statistically significant, begging the question of its quality.

Estimated Sheepskin Effects in Thailand and Malaysia, Selected Worker Characteristics [Dependent Variable: individual log hourly wage]

V. The Way Forward

Addressing the Skills Inadequacy Enforce the Nine years Compulsory Education Address Issues of completion and quality of Secondary Education Sustain efforts in providing improved education in rural areas Strengthen provision of English, Science, Technology, and ICT at all levels of Education

Skills Development: More Sustained Efforts Needed Most of the courses offered by Skills Development institutions are still supply driven… Need for more coordination among the 9 different ministries that provide training courses for different target groups. The Vocational Education Act may provide a platform to improve both curriculum and system Programs under the Department of Skill Development (Ministry of Labor ) should be strengthened and monitored for results (tracer studies…). So, should be the activities of the Skill Development Fund