The Changing Demand for Skills in the UK

In this latest blog post, Andy Dickerson and Damon Morris changes in skill utilisation and returns to skills over time in the UK. 

‘Skills’ have long been a major policy priority, yet they are hard to measure. Skills are multi-dimensional, intangible and often unobservable. They are not well represented by individuals’ qualifications or by the occupational classification of the jobs they do. In the US information on skills is gathered from self-reported assessments by workers as well as from professional assessors. This Occupational Information Network, O*NET, system provides measures of skills, abilities, work activities, training, and job characteristics for almost 1,000 different US occupations. In our new paper, we show how these skill measures can be matched to UK data. We develop a database of comprehensive and detailed multi-dimensional occupational skills profiles for the UK which describe the utilisation of skills in the workplace.

We then utilise our occupational skills profiles to assess the changing demand for skills in the UK. We construct three indices of skills: analytical/cognitive skills; interpersonal skills; and physical/manual skills. We combine these with individual data on wages and employment from the Annual Surveys of Hours and Earnings (ASHE) and the Labour Force Survey (LFS) to produce a 4-digit SOC occupational-level panel dataset for 2002-2016. We use this dataset to examine the change in skills utilisation in employment over the period, and to estimate the wage returns to these skills. We argue that these two measures together provide a comprehensive picture of the changing demand for skills in the UK.

Changes in the utilisation of skills

Our results indicate strongly increasing use of both analytical skills and interpersonal skills, and declining use of physical skills over the period 2002-2016. Over the whole period, the index of analytical skills suggests that utilisation of this skill set grew by 10% over the period. The increase in interpersonal skills was more than double this (+23%), while utilisation of physical skills fell by 14%. These trends accord with our general understanding of the changing occupational structure of employment and the growth of services and the decline of manufacturing.

At the aggregate level, these trends are a consequence of a combination of both changing skills within (broader) occupations, and changes in the occupational structure of employment. Some evidence on where the changes are primarily situated can be obtained from undertaking a decomposition of the overall change in skills utilisation between 2002 and 2016 in each of the three skill measures. Specifically, we examine the extent to which the aggregate changes in each index of skills is a consequence of within-occupation or between-occupation changes.

Around 20-25% of the increase in analytical skills utilisation is between occupations, while the remaining 75-80% is within occupations. The within-occupation changes for interpersonal skills and physical skills are even greater. This decomposition suggests that the overall changes in skill utilisation are pervasive throughout employment and are affecting all occupations, rather than being concentrated in certain occupational groups. Thus, over the period 2002 to 2016, the UK labour market has seen a substantial increase in the utilisation in employment of analytic and, especially, interpersonal skills, and a decline in the use of physical skills in employment.

Change in the return to skills

We next turn to examine the returns to skills. We use a simple Mincerian log earnings function specification to estimate the conditional (wage) returns to skills and to compute the changing returns over time. The returns to our three measures of skills are illustrated in the below Figure, where we have standardised (mean 0, variance 1) the skills indices in order that comparisons between them can more easily be made.

Trends in the Returns to Skills 2002-2016

The dashed lines connect the year-by-year point estimates of the wage returns to analytic, interpersonal and physical skills. As can be clearly seen, the returns to analytic skills are strongly trended upwards over time. An alternative specification which interacts a linear time trend with the index of analytical skills is superimposed (together with its 95% confidence interval). The coefficient on the time trend for analytic skills shows that an occupation with a one standard deviation higher level of analytic skills will be associated with almost 2% higher wage growth relative to an occupation with an average level of analytic skills. Clearly, over the sample period, the returns to analytic skills have been not only positive and statistically significant but have been increasing strongly. It is important to note that this increase in returns has occurred while the utilisation of analytical skills has also been increasing.

The returns to interpersonal skills were clearly close to zero in the early part of the sample period, but have also been increasing over time. Again, this increasing return has occurred at the same time as the utilisation of interpersonal skills has been increasing sharply. We therefore conclude that the demand for both analytical and interpersonal skills is strongly increasing over the period of analysis.

Finally, the returns to physical skills are negative throughout the period but are fairly constant over time. In this case, the slope of the time trend is insignificantly different from zero. Recall that the utilisation of these skills has been falling sharply over the period. This suggests declining demand for these skills in employment over time, although this has been coupled with a corresponding reduction in supply.

The findings demonstrate the increasing importance of work-related skills for individuals’ earnings, over and above their educational qualifications and, in particular, for higher levels of analytical skills and interpersonal skills in the workplace. Our interpretation of the increased utilisation coupled with increasing returns to analytic and interpersonal skills is that the UK is experiencing significantly increased demand for these skills in the labour market. The policy implication is that analytical and interpersonal skills need to be developed within every type of education – whether so-called ‘vocational’ or ‘academic’. This is what the modern labour market requires.