Ukraine Labor Demand 2009

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Ukraine

Labor Demand Study

January 2009

Human Development Sector Unit

Europe and Central Asia

Region


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CURRENCY AND EQUIVALENT UNITS

(As of January 11, 2009)

Currency Unit =Hrivnya

US1$=8.29_

UAH

GOVERNMENT FISCAL YEAR

January 1 December 31

ACRONYMS AND ABREVIATIONS

BEST Bureau of Economic and Social Technologies

CBQAS Competency based quality assurance system

CEE Central and Eastern EuropeCIS Commonwealth of Independent StatesEAQE Equal Access to Quality EducationEC European CommissionECA Europe and Central Asia

EU European UnionETF European Training FoundationFAT Fixed Agricultural TaxFYROM Former Yugoslav Republic of MacedoniaGDP Gross Domestic ProductHBS Household Budget SurveyILO International Labor OfficeIMF International Monetary FundMoF Ministry of FinanceMoJ Ministry of JusticeMoLSP Ministry of Labor and Social PolicyMTEF Medium Term Expenditure Framework

NGO Non-Governmental OrganizationNMS European Union New Member StatesOECD Organization for Economic Co-operation and DevelopmentPFR Public Finance ReviewR&D Research and DevelopmentSAM Serbia and MontenegroSME Small and Medium EnterpriseSSC State Statistics Committee of Ukraine


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TEW Transition from Education to Work SurveyTIMSS Trends in International Mathematics and Science StudyTVET Technical Vocational Education and TrainingULMS Ukrainian Longitudinal Monitoring SurveyWTO World Trade Organization

Vice President:Country Director:Sector Director:Sector Manager:Team Leader:

Shigeo KatsuMartin RaiserTamar Manuelyan AtincGordon BetchermanCem Mete


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ACKNOWLEDGEMENTS

Jan Rutkowski (Lead Economist, ECSHD) prepared the report with input from the

broader Bank team working on education and labor market issues in the Ukraine. Theteam comprised Harry Anthony Patrinos (Lead Education Economist, HDNED), OlenaBekh (Education Specialist, ECSHD), Cem Mete (Senior Economist, ECSHD), StefaniaRodica Cnobloch (Consultant, ECSHD), Yulia Smolyar (Social Protection Specialist,ECSHD) and Nataliya Avshenyuk (Consultant, ECSHD). The team benefited fromcomments from Martin Raiser (Country Director, ECSHD), Gordon Betcherman (SectorManager, ECSHD) and peer reviewers Pablo Saavedra (Senior Country Economist,ECSHD), Ruslan Yemtsov (Lead Economist, MNSED) and Edmundo Murrugarra(Senior Social Protection Economist, LCSHS). The report has also benefited fromwritten comments on the final draft from the Ministry of Labor and Social Policy. SusanMiddaugh edited the report.

This labor demand study is one of the outputs of the World Banks collaboration with theEuropean Commission (EC) and the European Training Foundation (ETF). The goal wasto issue joint policy recommendations for the modernization of the education system andto boost the development of human capital in the Ukraine. The study reflects coordinatedresearch in the areas of skills supply and labor market demand. In particular, we want toacknowledge the support and contributions of Claudia Fisher, Vira Rybak and TimoKuusela of EC and ETF, respectively.

During this process, the World Bank and the EC collaborated with government and non-governmental stakeholders and experts. Our main partners in the government were the

Ukrainian Ministries of Education and of Science, Labor and Social Policy, Economyand Finance, the State Statistics Committee as well as the State Employment Service.Social partners provided valuable advice and expert contributions, particularly theConfederation of Employers and BEST analytical centre.

Ukrainian FoundationHromadska Dumkacontributed to the design of the Labor DemandSurvey, which is the main data source used in this report, and implemented the survey.The Kyiv International Institute of Sociology implemented a skills survey andcontributed to the data analyses. The team is grateful to the Kyiv School of Economicsfor their analyses of the second and third waves of the ULMS data sets. The report alsobenefited from discussions with staff members of the Ukrainian State Statistics

Committee and the Institute of Demography. Research for this report grew out ofperiodic consultations with stakeholders and discussions with experts during theorganization of five workshops between February 2007 and April 2008.

The views expressed in this report are those of the World Bank team. The diagnosticinformation contained in it will form the basis of a joint policy note with the EuropeanCommission.


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Table of ContentsIntroduction ......................................................................................................................... 5

Summary of Key Findings and Policy Areas .................................................................. 6Is There a Skills Mismatch in the Ukraine? ...................................................................... 11

Skills of the Workforce in the Eyes OF EMPLOYERS: Ukraine compared to other

Transition Economies ................................................................................................... 11Box 1. Classification of Occupations and Skill Levels............................................ 17

Enterprise restructuring and Labor Demand ..................................................................... 20Old Jobs and New Jobs ..................................................................................................... 29Skills Mismatch ................................................................................................................ 32How to Address the Skills Mismatch? .............................................................................. 40Bibliography ..................................................................................................................... 48


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I. Introduction

The main objective of this report is to quantify the extent of the mismatch between theskills of the labor force and the skills employers demand. Based on this information, the

report argues for a need to increase the quality and relevance of the education andtraining system to satisfy the needs of the labor market. The goals are to promote growth,productivity and innovation; to strengthen social partnerships with employers so they aremore apt to articulate the skills they need and provide the necessary training.

Since the year 2000, Ukraine has enjoyed relatively strong economic growth. Thisdevelopment is consistent with a broader regional trend (Table 1). One outcome of thisgrowth period was that real wages increased significantly, especially in Kyiv and inEastern Ukraine. The growth in real wages occurred across all industries; however, thehighest growth was apparent in the finance, transport and communications sectors (WorldBank 2007a). Nevertheless, beginning in the fourth quarter of 2008, the Ukrainian

economy went into a recession. Annual economic growth declined to 3.5 percent over an11-month period. Furthermore, in 2008, the global demand for steel, Ukraines mainexport, dropped significantly.1

This crisis had a serious impact on the economy and labormarkets. However, it is premature to fully document the implications of these events. Asa result, this report focuses instead on the period that began in 2000 because the dataoffers that opportunity and the topics addressed herein remain highly relevant to theUkraine. In addition, the need for long-term reform must remain on the policy agenda.Once the economy picks up again, the shortage of skills will continue to be a majorconstraint on job creation and economic expansion. Thus, the policy challenges raised inthis report will still need to be addressed.

Similar to the experience of other countries in transition, Ukraine shifted away fromagriculture and toward a service economy. Employment reflected this shift, but theagenda for structural reform did not keep up with the change. The EBRD transition indexshows that up until 1997 Ukraines progress in structural reforms was similar to that ofnew EU members; then it fell behind. Likewise, the World Economic Forum globalcompetitiveness index suggests that the Ukraine lags behind many of its peers in EasternEurope as well as the more advanced middle income countries. There is concern aboutthe sustainability of the earlier growth. Experts point to the lack of diversification inexports, the risk of competition from industrial conglomerates, and the drop inproductivity relative to growth in wages.

And yet, between 2002 and 2006, poverty declined significantly -- from 25.5 percent in2002 to 14 percent in 2004, 7.9 percent in 2005 and 6 percent in 2006 (Table 1).

2

1 Ukraine Economic Update. World Bank, December 2008.

Thisdecline was due in part to economic growth, rising wages and a generous increase inpublic transfers, notably pensions and childbirth assistance. Although increases in public

2 As can be expected, wage inequality increased during the transition to a market economy as measured by Gini coefficients but

not as much as in Russia (Ganguli and Terrell 2005).


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spending have contributed to a dramatic decline in poverty in the short run, authoritieswill be unable to sustain high levels of public transfers unless the economy continues togrow significantly and the tax base remains viable. An aging population alone could be amajor obstacle to continued economic growth and further improvements in the standardof living.

3

Future demographic trends could pose significant challenges over the long

term. However, reforms in education and the labor market could ameliorate some of thesechallenges. Under the circumstances, it is imperative to have a good understanding of theprevalence, characteristics, causes and implications of the mismatch of skills in the labormarkets. That way key bottlenecks can be identified and rectified in a timely manner.

Table 1: Selected Economic Growth, Poverty and Labor Indicators2002 2003 2004 2005 2006

GNI per capita (USD, Atlas method) 780 970 1,260 1,520 1,910

Change in real GDP (%) 5.2 9.6 12.1 2.7 7.1

Health expenditures (as % of GDP) 3.3 3.6 3.5 3.5 3.7

Education expenditures (as % of GDP) 5.4 5.6 5.3 6.1 6.3

Poverty 25.5 19.5 14.0 7.9 6.0

Labor force participation rate 57.2 57.0 56.2 56.1 56.1

Unemployment rate (ILO definition, %) 9.6 9.1 8.6 7.2 ---

Real wages (UAH per month) 439.4 540.9 710.3 954.6

Real wages (% change) 18.2 15.2 23.8 20.3 ---

Sources: Statistics for the first four indicators come from the Ukraine Public Finance Review II; the

original data sources appear as SSC, NBU, MoF and State Treasury. Poverty estimates for 2002-2004

come from the 2007 Ukraine Poverty Update. The poverty estimate for 2006 derives from the same

methodology and uses 2006 HBS data. The unemployment rate and wage data come from the State

Statistics Committee yearbooks. Labor force participation rates are from ILO-LABORSTA.

SUMMARY OF KEY FINDINGS AND POLICY AREAS

Summary of Key Findings

During Ukraines economic growth period, the demand for skills went up across all jobcategories. If the supply of skills is constant, the result ought to be a rising skills premiumthat brings the market back into equilibrium. (It is understood that the supply may declinein future due to out-migration and an aging population.) However, the skills premium inthe Ukraine remained modest compared to other countries. The reasons for thatimbalance may be due to high payroll taxes, the public sectors prominent role in theeconomy, and the segmentation of the professional job market and investment delays.The complementary nature of skills and investments limits a firms ability to offercompetitive wages. The following summary illustrates the extent of the skills mismatchin the Ukraine and discusses the implications.

3 Ukraines population decreased by 7.5 percent over the last decade . If current trends continue, then the population will decline by40 percent by 2050. In comparison to 2005, the number of 15-64 year olds in the labor force is projected to decline by 43 percent and

the elderly population (65+ year olds) is projected to increase by 13 percent.

Such demographic trends would havea

sizable impact

on all aspects of life , including the education sector and the labor market.

The labor market

is the focus of this report.


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1. As many as 20 percent of Ukrainian firms regard the skills of available workers asa major obstacle to their firms operation and growth. This percentage is higher in theUkraine than any other transition economies in Eastern Europe and the former SovietUnion. Furthermore, it takes significantly more time to fill a job vacancy in the Ukrainethan in most other transition economies, particularly a vacancy for skilled manual

workers. This suggests that the Ukrainian economy suffers from a severe shortage ofskills. These shortages coincide with unemployment. The implication is many of theunemployed lack the skills employers need.

2. Excess demand for some skills coexists with an overabundance of other skills.For example, there is an excess supply of less skilled blue- and white-collar labor. Theunemployed find job hunting difficult because their skills are not in demand. Such amismatch of skills negatively affects economic performance and social welfare; it alsohampers the growth of firms and may limit the creation of jobs. The skills mismatch alsogives rise to structural unemployment, which is impervious to growth in labor demand.

3. In comparison to their counterparts in other countries, Ukrainian employers viewthe lack of appropriate skills by their workers as more of an obstacle to their firmsoperation and growth than access to capital, corruption or business permits. Hiring aworker with the necessary skills is more difficult for modern firms than traditional ones.Modern firms need twice as much time (5 weeks compared to 2.5 weeks) to recruit a non-production worker than traditional firms. As many as 25 percent of Ukrainian firms thatincreased employment over the last three years regarded worker skills as a major obstaclecompared to 15 percent of firms that did not add jobs. Thus, modern and expandingfirms are more vulnerable to a shortage of skills.

4. The mismatch of skills namely a shortage in some areas and an excesssupply in others is more apt to occur during periods of accelerated restructuring ofbusinesses and the reallocation of jobs that accompanies it. Newly-created jobs tend todiffer in skill content from the jobs they are replacing. A shift away from themanufacturing sector toward the service sector, which is characteristic of economictransitions in Eastern Europe, implies a drop in demand for manual workers and anincrease in demand for non-manual ones. Similarly, the reallocation of jobs within aparticular industry reflects a shift away from less productive enterprises and toward moreproductive ones. The latter tend to use more advanced technology than the former; as aresult, the demand for a higher level of skills rises.

5. However, the low rate of job reallocation in the Ukraine suggests that enterpriserestructuring is unlikely to contribute to a major skills mismatch. In 2007less than threepercent of all jobs shifted from firms that were shrinking to those that were expanding.This percentage is roughly one-half to one-third of that observed in other transitioneconomies undergoing restructuring. Instead, a variety of factors may have contributedto this situation, including an educational system that is insufficiently responsive to thechanging demands of the labor market. This lack of responsiveness may reflectinstitutional inertia; educational institutions do not adjust their curricula and trainingprograms to employers needs. In addition, students may not take labor market


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conditions into account when making their career choices because they are unaware ofthem.

6. Nevertheless, the structure of the Ukrainian economy is changing. Employmentgrowth is particularly strong in the service sector (individual services, trade, financial

services). Growth is relatively slow in industry and negative in agriculture. As a result,the occupational composition of jobs in these sectors is changing too. The share of non-manual jobs in the service sector is on the rise; meanwhile, jobs in manual industry andagriculture are decreasing. This trend is common in virtually all transition economies ofEastern Europe; the Ukraine is not an exception.

7. In 2007 employment increased in the overall economy and in most industries.Although the rate of job creation is relatively low in the Ukraine, it is higher than the rateof job destruction. The net effect: employment grew. Growth in output means hiringadditional workers and expanding employment. In 2007 one Ukrainian firm in fourincreased employment compared to one firm in seven that reduced it. As a result, the

vast majority of workers are in firms that are stable or expanding; a minority of workers(14 percent) work for firms that are shrinking in size. In other words, most workers arenot affected by company downsizing or forced to change jobs.

8. The job creation rate is particularly strong in small, newly-established privatefirms. The rate of job creation among firms that are less than five years old is twice thatof firms more than 10 years old. New firms expand employment much more rapidly thanolder ones. The segment of small firms is heterogeneous. Some of them have contributedto a job creation rate of six percent; others have trimmed employment. These two forcescancel each other out. As a result, employment among small firms is roughly stable. Incontrast, employment among larger firms is growing; they tend to destroy fewer jobs thansmall ones.

9. During the period of economic growth, labor demand was strongest in theconstruction and market services industries. The job creation rate in the constructionsector approached seven percent compared to job losses of fewer than two percent. Thenet effect: the construction industry increased employment by approximately five percentin one year. The market services industry experienced a similar, albeit a less pronounced,growth in employment. This pattern is typical for growing economies in transition. Themarket services sector adds to the growth in income which, in turn, leads to a boom inhousing.

10. Most of the jobs being destroyed are in old firms, industry, agriculture, andelementary occupations. Small firms and the market services industry have alsoeliminated jobs. For example, more than 50 percent of all jobs destroyed last year werein old firms; close to 40 percent were in industry.

11. Most of the jobs being created are in young firms, the market services industry,and skilled blue-collar occupations. More than 50 percent of new jobs take place in largefirms. This pattern is unusual, but it reflects the Ukrainian economy, which remains


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dominated by large enterprises. Approximately three-quarters of all newly-created jobsare for manual workers. One-half of these jobs are for skilledmanual workers, such ascraftsmen (electricians, welders, plumbers, etc.) and machine operators. One-fourth ofnew jobs are for unskilledmanual workers. In comparison, slightly more than 20 percentof all newly-created jobs are for non-manual workers, including managers, professionals

and associated professionals, office workers and those in the service sector. This situationhighlights a strong demand for skilled manual (blue-collar) workers and a relatively weakdemand for non-manual (white-collar) workers. It also reflects the makeup of theUkrainian economy, which still has a high concentration of industry and a fast-growingconstruction sector.

12. Newly-created jobs differ from jobs that are being eliminated in two importantways. Jobs are shifting away from industry and agriculture and toward market servicesand construction. Second, the demand for labor in the Ukraine has moved away fromunskilled manual labor and toward skilled manual labor. However, the change in demandfrom manual to non-manual labor is less pronounced here than in other transition

economies in Central Europe. The demand for highly skilled professional workersremains relatively weak.

13. A high level of professional skills is in short supply in the Ukraine. According toemployers, the higher the skill level, the more difficult it is to fill a vacancy. A largepercentage of vacancies for professional workers are in the public sector; wages aregenerally lower there than in the private sector. That is especially true in social services.The public sector needs to be restructured to make the reallocation of labor moreproductive.

14. Manual labor requiring a high degree of skill is in short supply too. Seventy-fivepercent of employers who were hiring this type of labor reported that it was difficult torecruit craftsmen with the skills they needed. As a result, Ukrainian employers are willingto pay relatively high wages for skilled manual workers. In contrast, salaries ofprofessional workers are relatively low despite a strong demand. On average firms thathire skilled crafts workers offer them wages that are about 35 percent higher than whatthey offer unskilled manual workers; the latter is the reference category. In comparison,the wage premium offered to professional workers is about 16 percent. This differentialis extremely low by international standards, much lower than in more advanced transitioneconomies.

Policy Areas

It is worthwhile to explore three areas of public policy which caused the mismatch ofskills observed in the Ukraine. They include reform of the education system to improvethe quality and relevance of schooling; labor market reforms to do a better job ofmatching workers with jobs; and new ways to tackle such demographic trends as lowlabor force participation by the elderly and the out-migration of skilled labor.


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15. The education system needs to be more responsive to the changing labor market.It needs to equip workers with broad and transferrable skills so they can adjust to a worldof increasing occupational mobility and rapid technological progress. The system alsoneeds to provide a solid foundation for life-long learning. Graduates of all types ofschools need to learn new skills to meet the growing demand. A system of adult

education and retraining needs to be developed; this is an area where the Ukraine lagsbehind other EU countries. Education should equip prospective workers with technical,hard skills and also non-technical, soft skills, including a work ethic. To achieve theseobjectives requires active collaboration between educators and the employer community.Employers must play a role in the design of education and training programs.

16. Labor markets need to be more efficient in matching workers with jobs. Wagesneed to adjust to supply and demand. Students and job seekers should have access to thelatest data about the labor market. Information about the skills and occupations that arein demand should be collected, analyzed and disseminated on a regular basis. Granted,some ingredients for such a system are in place; however, others are missing or need

refinement. For example, wage data by occupation is not collected. Information thatdoes exist needs to be easily accessible by the public and in a user-friendly format.

17. In the Ukraine, participation in the labor force by older workers is scant. And yet,some of these workers have skills that are in short supply. Mobilizing this group can helpto address skill shortages and assist the aging Ukrainian society. It could be done in twoways: by providing financial incentives for delayed retirement and by gradually raisingthe official retirement age for men and women to 65. The out-migration of skilled laboris also a cause for concern. Furthermore, there is a lack of information on thecharacteristics of those who migrate and an absence of documentation on their earningsand remittances. A crucial first step to remedy this situation would be to analyze recentdata on migration collected by the State Statistics Committee of the Ukraine.


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Is There a Skills Mismatch in the Ukraine?

As many as 20 percent of Ukrainian firms regard the skills of available workers as amajor obstacle to their firms operation and growth. This percentage is higher than in any

other transition economy of Eastern Europe and the former Soviet Union. Furthermore, ittakes significantly longer to fill a job vacancy in the Ukraine than in most other transitioneconomies, particularly a vacancy for skilled manual workers. These figures suggest thatthe Ukrainian economy suffers from a severe shortage of skills. It coincides withunemployment. Many of the unemployed lack the skills employers require. Excessdemand for some skills coexists with excess supply of other skills. For example, there isan excess supply of less skilled blue- and white-collar labor. Employers find it difficultto recruit workers with the necessary skills. The unemployed find it difficult to secure ajob because the skills they possess are not in demand. This is called a skills mismatch,but it is more than just a term. The mismatch negatively affects economic performanceand social welfare. It also hampers business growth and may limit job creation. Second,

it gives rise to structural unemployment, which is immune to growth in the demand forlabor. The skills mismatch in the Ukraine stems from a number of factors; the outmigration of skilled workers is a prominent one. Furthermore, the educational system isunresponsive to the needs of the labor market and the labor market in turn is slow tomatch workers with jobs.

This report looks at the skills mismatch from the demand side. It focuses on the labormarket as a contributing factor to the mismatch of skills, but it does not analyze the roleof the educational system or out-migration. The analysis is limited to formal sectoremployment and to wage and salary workers.4

First, this report compares employersassessments of workers skills in the Ukraine to other transition economies. Second, itexamines the link between this mismatch and enterprise restructuring which is underway.

Third, it compares the profile of newly- created jobs to that of old jobs being eliminated.Fourth, it analyzes skills mismatch in more detail by identifying the skills andoccupations that are in short supply with those that are overabundant. The reportconcludes by discussing policies to remedy the skills mismatch.

SKILLS OF THE WORKFORCE IN THE EYES OFEMPLOYERS:UKRAINE

COMPARED TO OTHER TRANSITION ECONOMIES

Are the skills of available workers an obstacle to a firms operation and growth? Is itdifficult to recruit workers with the skills employers require? One way to answer these

questions is to seek the views of employers. The Business Environment and EnterprisePerformance Survey (BEEPS) allows comparisons of employers assessments of

4 Informal sector employment is estimated at about 14 percent of total employment. Manual workers are more likely to work in the

informal sector than highly skilled non-manual workers (Lehmann and Pignatti 2007). As a result, this analysis probably

underestimates the demand for manual labor. It does not cover the self-employed, who represent a significant part of total

employment. Many of the self-employed are de facto employees hired as external contractors for tax reasons. This omission may bias

results for occupational employment and wage structures.


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workforce skills by country. Ukrainian employers are more apt to view workforce skillsas a major obstacle to their firms operation and growth than employers in other countriesin the ECA region. On average it takes more time to find a worker in the Ukraine withthe necessary skills than in other countries.

Worker skills are a major obstacle to the growth of Ukrainian firms

One Ukrainian firm in five reports worker skills as a major obstacle to the

companys operation and growth. This is almost twice the ECA average (Figure 1).The percentage is substantially higher than in neighboring countries, such as Poland,Romania or Russia. Just 12-14 percent of firms in these countries consider worker skills amajor problem.

5

Figure 1. Skills shortages are more often seen as a major obstacle in the Ukraine than in

other countries in the region

Percentage of Firms Reporting Skills of Available Workers as Major Obstacle to Firm Operation and

Growth, 2005

0 5 10 15 20 25

Azerbaijan

Armenia

Bosnia

TajikistanUzbekistan

Slovenia

FYROM

Belarus

Estonia

Croatia

Kazakhstan

Slovakia

Turkey

Bulgaria

Albania

SAM

Moldova

Czech

Romania

Russia

Hungary

Poland

Georgia

Lithuania

LatviaKyrgyzstan

Ukraine

%

ECA average

Source: EBRD-World BankBusiness Environment and Enterprise Performance Survey, 2005; Bank staffcalculations.

Skill shortages mostly afflict modern and expanding firms. For example, as many as25 percent of Ukrainian firms that increased employment over the last three years viewed

worker skills as a major obstacle compared to 15 percent of firms that did not expand(Figure 2). This implies that skills shortages may become a constraint on the developmentof a modern sector in the Ukrainian economy.

5 These views are subjective. Ukrainian employers are more apt to complain about worker skills than employers in Azerbaijan or

Tajikistan, where the general skill level is significantly lower than in the Ukraine. On average jobs in the Ukraine are more

productive than in Azerbaijan or Tajikistan. Ukrainian employers seek workers with higher skills than their Azeri or Tajik

counterparts. Worker skills are relative to the job requirements.


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Figure 2. Modern and expanding firms are particularly afflicted by skills shortages

Percentage of Firms Reporting Worker Skills as Major Obstacle by Sector

Ukraine 2005

0

5

10

15

20

25

30

Employment growth Use of internet

% Expanding/Modern sector

Shrinking/Traditional sector

Note: Firms are categorized as modern if they use the Internet in interactions with their clients andsuppliers. Otherwise, they are considered traditional.


Worker skills rank among the top concerns of employers in the Ukraine. Figure 3shows that Ukrainian employers rank the shortage of skills higher than employers inother ECA countries. For example, compared to their counterparts in other countries,Ukrainian employers viewed worker skills as a greater obstacle than access to capital,corruption or business permits. That is an important finding.


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Figure 3. Skills of available workers are among the top concerns of employers in the

Ukraine

Relative Imporance of Obstacles to Firm Operation and Growth

Ukraine, 2005

Electricity

Transportation

Anti-competitive practices

Tax administration

Telecommunications

Labor regulations

Customs

Contract violations

Organized crime

Licenses & permits

Judiciary

Corruption

Theft

Financing, access

Policy uncertainty

Skills

Land, access

Macroeconomic instability

Financing, costTax rates

Land, title

ECA average

more importantless important

Note: The chart shows deviations from the regional and factor means. Bars to the right of the ECAaverage axis indicate that the obstacle is more severe than in other countries in the region and more severethan the average obstacle within the country.


The amount of time necessary to recruit a worker with the required skills is a different,more objective measure of the skills shortage. Ukraine fares worse than othercountries in the region on this measure. On average it takes more than five weeks tofill a vacancy for a skilled worker in the Ukraine, compared with less than four weeks inEU10 countries and an ECA average of approximately three weeks (Figure 4).

6

6See Box 1 for the definitions of occupational categories used by different data sources.

Similarly, Ukrainian firms need more time to hire a professional or a non-productionworker.


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Figure 4. Recruiting a worker with the required skills is more difficult in the Ukraine than

in other countries in the region

Time Needed to Fill Vacancy by Occupation

2005

0

1

2

3

4

5

6

Manager Professional Skilled worker Unskilled worker Non-production worker

weeks Ukraine

EU-10

ECA


Again, hiring a worker with the required skills is more difficult for modern firms

than for traditional ones. For example, modern firms need twice as much time (5

weeks compared to 2.5 weeks) as traditional ones to recruit a non-production worker(Figure 5). This is consistent with employers subjective assessments. Modern andexpanding firms are the main victims of the skills shortage. The lack of adequateworkforce skills may become a binding constraint on the modernization and growth ofthe Ukrainian economy.


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Figure 5. Modern firms suffer from skills shortages more than traditional firms

Time Needed to Fill Vacancy by Occupation and Modern/Traditional Sector

Ukraine, 2005

0

1

2

3

4

5

6

7

Manager Professional Skilled work er Unskilled worker Non-production worker

weeks

Modern firms

Traditional firms

Note: Firms are categorized as modern if they use the Internet to interact with their clients and suppliers.Otherwise, they are categorized as traditional.


It is most difficult to fill vacancies for professional workers

Professional skills are in short supply in the Ukraine. According to employers, thehigher the skill level, the more difficult it is to fill a vacancy (see Box 1 for theclassification of skills). It is most difficult to fill vacancies for professional workers.Nearly 90 percent of employers interviewed reported that recruiting a professional withthe required skills is very difficult (Figure 6).


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Box 1. Classification of Occupations and Skill Levels

This report relies mainly on the International Standard Classification of Occupations, known asISCO-88 rev. 3. The Ukraine Labor Demand Survey and the State Employment Service use this

classification. However, the IBRD World Bank Business Environment and EnterprisePerformance Survey (BEEPS) uses a different, simpler classification. Box 1 maps BEEPSoccupational categories with ISCO88s.

ISCO-88

Major groups

ISCO-88

Skill levelBEEPS

1. Senior officials and managers - Managers

2. Professionals 4Professionals

3. Technicians and associate professionals 3

4. Clerks

2

Non-production workers5. Service workers and shop and salesworkers

6. Skilled agricultural workers

Skilled workers7. Craft and related trades workers

8. Plant and machine operators andassemblers

9. Elementary occupations 1 Unskilled workers

In this report, high non-manual (white collar) skills refer to ISCO-88 groups 1 and 2. Highmanual (blue collar) skills refer to ISCO-88 groups 6, 7 and 8. Lower non-manual skills refer toISCO-88 groups 4 and 5. Low manual skills refer to ISCO-88 group 9.

High manual skills are in short supply too. Recruiting a craftsman with the necessaryskills is difficult, according to 75 percent of employers who were hiring this category ofworker. That is a Ukrainian peculiarity. It indicates a high demand for skilled manualworkers that remains unmet. This finding is consistent with one previously reported; ittakes substantially more time to fill a vacancy for a skilled manual worker in the Ukrainethan in other countries in the region. It is also in keeping with the low ratio ofunemployment/vacancies for skilled manual workers (craftsmen) reported later in thissection.

In contrast, it is much easier to fill vacancies for less skilled workers. Employershave the least problem in recruiting unskilled manual labor and less skilled non-manualworkers in administrative, service and sales occupations. Although it is easier to hire a

less skilled worker than a highly skilled one, the percentage of employers who havedifficulty hiring less skilled workers is still substantial. For example, 40 percent ofemployers say that it is hard to hire an administrative worker with the skills they need.


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Figure 6. Professional workers who possess the required skills are most difficult to recruit

Percentage of Managers Who Say that Filling a Vacancy for a Particular Occupation is Difficult

2007

0 10 20 30 40 50 60 70 80 90

Elementary occupations

Clerks

Service & sales

Machine operators & assemblers

Craftsmen

Managers

Skilled agricultural workers

Technicians & assoc. professionals

Professionals

Source: World Bank Ukraine Labor Demand Survey 2007, Bank staff calculations.

Salaries offered to professional workers are still relatively low

The relatively high wages enjoyed by skilled manual workers in the Ukraine reflects

the strong demand for their services. In contrast, salaries paid to professional

workers are relatively low despite a strong demand. Figure 7 shows that, on average,

firms that hire skilled craft workers offer them a wage premium that is about 11 percenthigher than those offered to unskilled manual workers (the reference category). Thisdifferential is roughly the same as the wage premium offered to technicians and associateprofessionals. On the other hand, professional workers seem to receive no premium fortheir skills. This finding is consistent with studies showing returns to schooling in theUkraine to be significantly lower than in other transition economies, especially the EUNMS (Rutkowski 2001, World Bank 2005b, Gorodnichenko and Sabirianova 2005,Patrinos 2007). For example, in Poland, professional workers, on average, earn morethan twice that of workers in elementary occupations.

7

Figure 7 However, for a number of

reasons, the results presented in should be interpreted with caution. First, theestimation error in some cases may be large due to a relatively small sample size.8

7 Data on Poland came from The Structure of Earnings by Occupation in 2007

, Central Statistical Office.

Second, a large percentage of vacancies for professional workers exists in the publicsector; wages are generally lower there than in the private sector. This is especially truein the social services sector. This sector employs a large percentage of professionalworkers (medical doctors, teachers, etc.) whose salaries are low (World Bank 2008). Thescant premium for professional skills probably reflects a disparity in the sectoral

8For example, 17 out of 1250 firms surveyed reported vacancies for professional workers (22 vacancies).


20/50


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20

Why do employers fail to respond to shortages of professional workers by offering

higher wages? Why are returns on professional skills so low in the Ukraine despite astrong demand? Are wages rigid? If so, what are the institutional causes? Answeringthese questions is critical to understanding the nature of this imbalance of skills.However, that requires more research. It may be that low returns on professional skills

are a statistical artifact. Better data are needed to comprehend how wages are determinedand the difference between the public and the private sectors. One hypothesis: theskills/education obtained before the transition to a market economy is not sufficientlyvalued. However, the 2007 ULMS data does not support this hypothesis. That is becausethe "potential experience" and "squared potential experience" coefficients in themincerian wage regressions are positive in various specifications (although the latter isvery close to zero, it suggests a linear positive age effect on wages).

9 Another

hypothesis: Ukraines wage structure is rigid. That makes sense because the state is thelargest employer and wage setting is centralized. The nature of collective bargaining inthe Ukraine also contributes to the same conclusion (World Bank 2005b).

10 The wage

grid which determines the relative wages of different occupational groups is set

centrally; the government acts as the main employer in wage negotiations with tradeunions. This grid applies to state-owned enterprises, which still account for a major shareof employment, and to many privatized and mixed ownership (state/private) enterprises.This hypothesis, tentative at best, requires further testing and should draw on statisticaland institutional information.

11

To conclude, skill shortages are a major obstacle to the operation and growth of

firms in the Ukraine, much more so than in other countries in the ECA region.Modern and expanding firms are particularly affected. Employers find it difficult torecruit managers, professionals and skilled manual workers. However, wages are slow torespond and disproportionate to the demand. The wage premium for highly skilled

workers, especially those with non-manual skills, is low (Patrinos 2007). Rigid wagesmay contribute to the shortage of skills; however, this is a tentative hypothesis whichrequires additional research and testing. Out-migration of skilled labor may also play animportant role. Addressing the skills issue is key to developing the modern, skillintensive sector of the Ukrainian economy and its future economic growth. Otherwise,skill shortages may become a drag on job creation and business growth.

ENTERPRISE RESTRUCTURING AND LABOR DEMAND

The mismatch of skills namely a shortage of some skills in juxtaposition with an

excess supply of others is likely to occur during periods when businesses restructure

9 Earnings regressions run separately for age groups 26 to 35, 36 to 45 and 46 to 55 also provide consistent results. There is noevidence of a premium on experience among younger age groups compared to those between the ages of 46 to 55.

10 In 2004 the association of employers signed 13 out of 77 existing sectoral wage agreements. . The balance took place between

trade unions and the states relevant line ministries (World Bank 2005b).11 Unfortunately, there is no regular survey of wages by occupation in the Ukraine like that carried out in many EU countries. The

data presented here, which came from a relatively small sample , refers to wage offers to job applicants.


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and reallocate jobs (see Box 2). Newly-created jobs tend to differ in skill content fromthe old jobs they replace. There are two causes. First, the reallocation of jobs takesplace between industries, away from declining industries and toward those that areexpanding. For example, the shift from the manufacturing sector toward the servicesector, characteristic of economic transition in Eastern Europe, implies a decline in

demand for manual workers and an increase in demand for non-manual workers.Second, the reallocation of jobs withina particular industry tends to be away from lessproductive enterprises and toward more productive ones. The latter tends to use moreadvanced technology than the former. As a result, the demand for a higher level of skillsincreases.

The skills mismatch, a consequence of enterprise restructuring and the job reallocationwhich ensues, changes the skills profile in the demand for labor. However, the mismatchis also a result of an educational system that is insufficiently responsive to the changingdemands of the labor market. It is a sign of institutional inertia. Educational institutionsdo not adjust their curricula and training programs to employers needs. It could alsoindicate students do not take labor market conditions into account when making their

career choices because they lack the necessary information to do so.

Enterprise restructuring is limited

Enterprise restructuring proceeds at a relatively slow pace in the Ukraine. The ratesof job creation and job destruction are low, lower than in most other transition economiesin Eastern Europe (Brown and Earle 2004, World Bank 2005a).

12Table 1 compares the

rate of job reallocation a measure of the pace of enterprise restructuring in theUkraine to those in other transition economies at different stages. In 2007 less than 3percent of all jobs moved from contracting firms to expanding firms in the Ukraine. Thispercentage is roughly one-half to one-third of the rate observed in other transitioneconomies (World Bank 2005a). These results for the Ukraine are consistent with those

obtained earlier. They offer further evidence that the slow pace of job reallocation is apersistent feature of the Ukrainian transition (World Bank 2005b).

Table 1: Job creation and job destruction: Ukraine compared to selected transitioneconomies

(as a percent of total employment)

Ukraine Georgia Moldova Croatia Bulgaria Lithuania Poland

2007 2006 2001 2001 2000 1998-99 1999

Job creation 5.5 8.7 6.7 3.5 6.8 9.7 5.3

Job destruction 2.7 6.6 11.2 4.9 10.8 10.7 10.1

Employment growth 2.8 2.1 -4.5 -1.4 -4.1 -0.9 -4.8

Job turnover 8.3 15.2 17.8 8.4 17.6 20.4 15.4

Job reallocation 2.7 6.6 6.7 3.5 6.8 9.7 5.3Note: Continuing firms (i.e. firm openings and closures are excluded).

Definitions:

12 The low rate of job turnover coexists with a high rate of labor turnover in the Ukraine. Workers move between existing jobs

without jobs being destroyed or created. In the Ukraine, job turnover contributes little to turnover in the overall labor market.

Although job turnover may give rise to a mismatch of skills, labor turnover in contrast often results in a better match between

job and worker. That is because the new jobs often require different skills than the old jobs.


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Job creation = sum of employment gains in firms that are expanding

Job destruction = sum of employment losses in firms that are contracting

Employment growth = Job creation - Job destruction

Job turnover = Job creation + Job destruction

Job reallocation = min(job creation, job destruction) = (Job turnover - absolute value of Employment growth)/2

Sources:

Ukraine: Labor Demand Survey, 2007; Bank staff calculations; other countries: World Bank country studies.

Box 2 The mismatch of skills has different dimensions

A skills mismatchoccurs when a shortage of some skills (occupations) coincides with an excesssupply of other skills (occupations). This situation is called a skills gapif there is a shortage ofhigh skills at the same time there is a surplus of low skills.

The skills shortagehas two dimensions. First, when there is an absolute shortage of workers for aspecific occupation. For example, when there are too few engineers or welders. Second, whenworkers are in an occupation that is in demand, but they lack some essential skills. For example,engineers whose skills are obsolete and who are not familiar with modern technology. Anotherexample: welders who can perform technologically simple operations, but employers need more

advanced skills.

Similarly, an excess supply of workers within a specific occupation can be due to a lack ofdemand or to a lack of some essential skills by job applicants. For example, there can be toomany economists relative to the demand or too many economists who are unfamiliar with foreignlanguages.

The skills gapcan be of two kinds. First, workers can have insufficient hard, technical abilities.These are the skills taught in school. Second, workers can lack soft skills, including motivation, awork ethic, communication, teamwork, etc. These are skills usually acquired outside of school --from family and the community at large. Surveys indicate many employers are particularlyconcerned about the soft skills. The skills gap often means a lack of soft, rather than technicalskills.

What are the symptoms of this skills mismatch? One is a large number of job vacancies that gounfilled. Unemployment means an excess supply of labor. The mismatch occurs whenunemployment coexists with unfilled vacancies: the unemployed do not meet the skillrequirements for jobs that are available. If employers are unable to fill jobs because there are noapplicants, this indicates an absolute skills shortage. If, however, they are unable to fill vacanciesbecause job applicants lack some essential skills, this suggests a skills gap.

The best objective measure of the skills shortage is the vacancy rate, namely the ratio ofvacancies to employment based on skill or occupation. Vacancies (the numerator) represent theunmet demand for a given type of labor; employment (the denominator) represents labor demandthat is satisfied. The higher the number of vacancies relative to employment, the higher theunsatisfied demand relative to the satisfied demand, the more severe the shortage is for a giventype of labor.

To measure the skills (occupational) mismatch, one needs to compare the number of vacancies ina given occupation with the number of jobseekers for that occupation. Use the unemployment-to-vacancies ratio(U/V ratio) to show the number of jobseekers for each job opening. The largerthe variation in the U/V ratio across occupations, the greater the skills mismatch. Occupationswhere the U/V ratio is high are in excess supply. Occupations where the U/V ratio is low are inshort supply. (If the U/V ratio is high across occupations, this means that the primary problem islack of jobs rather than a mismatch of skills).

Source:Bank staff analysis.


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The slow pace of enterprise restructuring is typical of most industries in the Ukraine(Figure 8). The rates of job reallocation are low even in industries like construction andtrade. In most countries these industries have high job turnover. In manufacturing andmining, which represent the dominant sector of the Ukrainian economy, the rate of jobreallocation is just 3.5 percent, which is low by international standards.

Nonetheless, there are changes in the structure of the Ukrainian economy. Figure 8shows that industries grow at different rates. Employment growth is particularly strongin the service sector (individual services, trade, financial services), relatively slow inindustry and negative in agriculture. This suggests the industrial and occupationalcomposition of employment is changing. The percentage of non-manual service sectorjobs is on the rise while manual industry and agricultural jobs are decreasing. This trendis common in virtually all transition economies of Eastern Europe. Ukraine is not anexception, although structural changes are slower here.

The low rate of job reallocation in the Ukraine suggests that enterprise

restructuring is unlikely to be a major contributor to a skills mismatch. The low rateof job destruction less than 3 percent of jobs were terminated in 2007 means thatfew workers were forced to move from old jobs to new ones. In contrast, in othertransition economies, the job destruction rate is usually about 10 percent. That means asubstantial percentage of workers have to make a transition from old to new jobs, whichcan be difficult, or become unemployed. The restructuring pressure on job mobility inthe Ukraine is much weaker by comparison; a mismatch of skills is less likely to emerge.If these mismatches do exist, the cause must be something other than structural change.This is not to suggest structural change does not contribute to a mismatch of skills. Itdoes, but in the current Ukrainian context its role is likely secondary.


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Figure 8. Low rates of job reallocation coupled with employment growth

Job Reallocation Rate and Employment Growth by Industry

2007

-8

-6

-4

-2

0

2

4

6

8

Agriculture Transport &

communication

Public services Industry National

economy

Finance & real

estate

Trade &

restaurants

Const ruction Ind ividual

services

%

Job reallocation rate Employment growth


But strong labor demand

In 2007 employment increased in the economy at large and in most industries

(Figure 8).13

The proportion of expanding firms is much greater than the proportion of

contracting firms. One Ukrainian firm out of four increased employment in 2007compared to one in seven that decreased employment (

Although the rate of job creation is relatively low in the Ukraine, it is higherthan the rate of job destruction, which translates into employment growth. Since 2000,

the growth in labor demand reflects strong growth in output in the Ukraine and possiblyan increase in labor content of growth. As with other transition economies, Ukraineexperienced a prolonged period of jobless growth during the early years of theMillenium when employment was largely unresponsive to growth in GDP. The lowelasticity of employment with respect to growth was due to downsizing. Companies shedredundant labor and used productivity gains to increase output rather than add jobs.Around 2005, that changed. The labor content of growth went up among most transitioneconomies of Eastern Europe. At that time, so did the Ukraines (World Bank 2007b).More recently, growth in output has come from hiring additional workers and expandingemployment.

Table 2). Employment gainsoccurred chiefly among larger firms, employment losses occurred in smaller firms. As a

13 Theestimated rate of employment growth, based on the Labor Demand Survey data, may differ from official estimates derivedfrom the Labor Force survey and other sources. The discrepancy may be due to differences in survey coverage, definitions and

sampling methodology.


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result, the vast majority of workers are employed by firms that are expanding or stable.Just a small minority (14 percent) work for firms that are shrinking in size. In otherwords, most workers are unaffected by corporate downsizing or forced to change jobs.This is consistent with earlier findings.

Most firms make modest changes in employment levels. The median number of

additional workers hired by expanding firms was three, which is the same number firedby firms that were contracting. Nevertheless, some firms changed their level ofemployment on a much larger scale. On average, expanding firms hired 12 workers andcontracting firms fired 10 workers. Typically, adjustments in employment are marginal.Mass layoffs and large increases in employment do happen, but they are concentratedamong a small number of firms.

Table 2. Firms by employment growth status, 2007

Firm category Firms (%)Employment

(%)

Averageemployment

(persons)

Changes in employment(persons)

median mean

All firms 100.0 100.0 53.5 0 1.5Contracting 14.3 14.1 53.0 -3 -10.2

Stable 60.6 41.9 37.1 0 0.0

Expanding 25.2 43.9 93.5 3 11.8

Note: Firm categorized by changes in employment over 12 months

Source: World Bank Ukraine Labor Demand Survey 2007; Bank staff calculations.

The job creation rate is particularly strong among newly-established private firms. The job creation rate in firms less than five years old is twice as high as firms that aremore than 10 years old (Table 3). New firms expand employment more rapidly thanolder ones. However, the job creation record of small firms in the Ukraine is somewhat

disappointing. In many transition economies, small firms are the engine of employmentgrowth. In contrast, large firms contribute most to employment growth in the Ukraine.Small firms are a mixture. Some rapidly expanded employment but at the same timemany of them reduced employment. These two forces canceled each other out. As aresult, employment in small firms is roughly stable. The job creation rate in large firms issomewhat less than in small businesses. However, large firms eliminated fewer jobs(relative to employment) than small firms. On a net basis, large firms expandemployment faster than their smaller counterparts.

Labor demand was strongest in construction and market services industries.14 In

construction the job creation rate approached 7 percent; the job destruction rate wasunder two percent. Net employment in the construction industry increased byapproximately five percent in 2006.15

14 Labor demand in the construction industry is highly cyclical and subject to strong variation.

The market services industry experienced asimilar, although somewhat less pronounced, growth in employment. This labor pattern

15 This is likely a lower estimate since employment in the construction industry is to a large extent informal and outside of this

analysis.


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for the market services industry is quite typical for growing transition economies. Thissector tends to flourish when growth in incomes leads to a housing boom.

Giving rise to labor shortages

High job vacancy rates attest to the fact growing firms and industries experience

labor shortages. In the overall economy, job vacancies a measure of the unmetdemand for labor account for 3.4 percent of total employment. This percentagereflects a strong demand for labor (Table 3). However, skill shortages hit some firms andindustries than others.

Table 3. Indicators of labor demand by firm characteristics, 2007

Firmcharacteristics

Job creationrate

Job destructionrate

Net jobcreation rate

Vacancy rate

All firms 5.6 2.7 2.9 3.4

Age (years)

- 5 8.8 2.3 6.4 4.3

6 10 4.8 2.7 2.1 3.2

11+ 4.1 2.9 1.2 3.0

Size

- 50 6.0 5.5 0.4 6.3

51 -250 5.8 2.3 3.5 3.3

251 + 5.3 1.5 3.7 2.1

Ownership

Private 5.6 3.2 2.4 3.9State andcommunal 5.4 1.4 4.0 1.9

Sector

Industry 4.9 3.5 1.4 2.7

Agriculture 2.3 8.7 -6.5 3.1

Construction 6.8 1.6 5.2 13.1

Public services 0.0 11.8 -11.8 3.2Marketservices 6.0 1.8 4.2 2.4

Note: Net job creation rate = job creation rate - job destruction rate = employment growth rate.

Vacancy rate = vacancies/employment (expressed as a percentage).


Most of the skills shortages affect firms that are young and small and operate in the

construction and financial sectors

Labor shortages have the greatest impact on newly-created and small firms. Inthose firms the vacancy rate is significantly higher than the national average (Figure 9,Panels A and B). In small firms the vacancy rate exceeds six percent, compared withapproximately three percent in medium-size firms and two percent in large firms. That isbecause smaller firms are more dynamic than larger ones; it is also true that smaller firmshave a more difficult time hiring additional workers with the skills they need. Thishampers their ability to grow compared to larger firms.

Labor shortages hit private firms harder than those in the public sector. Thevacancy rate in the private sector is eight times higher than in the public sector (Figure 9,


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Panel C). Private firms tend to be younger and smaller than public firms. The type ofownership may be a factor if workers prefer public employers because they want greaterjob security or if they feel private employers are more selective in hiring. Regardless ofthe reason, labor shortages seem to hinder job creation in Ukraines private sector.

The construction industry is hit hardest by labor shortages. The vacancy rate in this

industry is 13 percent, four times higher than the national average (Figure 10). Theseemployers find it difficult to recruit workers with the required skills. Labor shortages inturn limit their ability to create new jobs.

In contrast, the vacancy rate for the market services industry which is also

witnessing high employment growth is low and below the national average. Thevacancy rate in this industry is 2.4 percent, which is five times lower than in construction.Labor shortages in the market service industry do not limit job creation. Employers inthis sector unlike their counterparts in the construction industry do not have aproblem finding workers with the required skills.

Skills may be a critical factor in hindering the prospects for business growth. The

difference between the construction and market services industries is a case in point.Both industries have grown. However, it is relatively easy to find workers with thenecessary skills in the services sector, but very difficult to do in the construction sector.Growth of some


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Figure 9. Young, small and private firms suffer from labor shortages the most

Panel A

Vacancy Rate by Firm Age

2007

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

5

- 5 6 - 10 11 +

Firm age (years)

Panel B

Vacancy Rate by Firm Size

2007

0

1

2

3

4

5

6

7

Small Medium Large

Panel C

Vacancy Rate by Firm Ownership

2007

0

0.5

1

1.5

2

2.5

3

3.5

4

4.5

Private Public

Note: The vacancy rate is the ratio of vacancies to employment.


industries and thus the economy at large hinge on the supply of workers withmarketable skills. This poses an important challenge to educational and training systemsand to students who need to make informed career choices. We elaborate on these issuesin the final section of this report.


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Figure 10. Construction and finance industries are particularly affected by skill shortages

Vacancy Rate by Industry

2007

0.0

2.0

4.0

6.0

8.0

10.0

12.0

14.0

Construction Finance & real

estate

Agriculture Personal &

community

services

Industry Trade, hotels &

restaurants

Public services Transport &

communication

%

national economy

Note: The vacancy rate is the ratio of vacancies to employment.


In sum, enterprise restructuring in the Ukraine has been less intense than in more

advanced transition economies. This implies a lower rate of job reallocation and alower rate of frictional unemployment. Ukraines high rate of economic growth in recent

years has led to a growth in labor demand. Meanwhile, the strong growth in labordemand has given rise to labor shortages. The number of job vacancies relative toemployment has increased; firms find it increasingly difficult to recruit workers with theskills they need. Labor shortages loom large in the booming construction industry andalso in the developing financial sector. Small, often newly-created private firms sufferthe most from labor shortages. Job vacancies often hinder their operation and growth. Ifnot addressed, labor shortages may become a drag on business expansion and jobcreation.

OLD JOBS AND NEW JOBS

The economic transition under way in the Ukraine requires an end to unproductive oldjobs in the declining sectors and the creation of new jobs in sectors of the economy thatare expanding. What is the profile of jobs that are being eliminated? What is the profileof new jobs? What is the difference between the two? Finally, what is the profile of jobvacancies? The difference between the skill structure (or content) of newly-created jobsand those being eliminated is a key factor to understanding the skills mismatch.


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Most jobs being destroyed are in old firms, industry, agriculture and elementary

occupations. Many jobs are also being eliminated in small firms and in the marketservices industry. For example, more than 50 percent of all jobs destroyed in the last yearwere in old firms; nearly 40 percent were in industry (Table 4). Close to 40 percent of alljob closures affected workers in elementary occupations. Jobs requiring a low level of

skill tend to be destroyed more than others.Most newly-created jobs are in young firms, in the market services industry, and in

blue collar occupations(Table 4). Most jobs more than 50 percent are created bylarge firms. This pattern is unusual. And yet, it reflects the structure of the Ukrainianeconomy, which is still dominated by large enterprises. In most other transitioneconomies, small firms tend to create new jobs. In the Ukraine, it is just the opposite.

Some three-quarters of all newly-created jobs are for manual workers. One-half ofthese jobs are for skilled manual workers, such as craftsmen (electricians, welders,plumbers etc.) and machine operators; one-fourth are for unskilledworkers (Figure 11).16

The changing nature of jobs

Slightly more than 20 percent of all newly-created jobs are for non-manual workers,namely managers, professionals and associated professionals, office workers and those inthe service sector. In short, the demand for skilled manual (blue-collar) workers is strongand the demand for non-manual (white-collar) workers is weak. This situation reflects thestructure of the Ukrainian economy -- a strong industrial presence alongside a fast-growing construction sector.

Newly-created jobs differ from jobs that are being destroyed in two important ways.

First, jobs are shifting away from industry and agriculture and toward market servicesand construction. Second, the occupation and skill requirements are different. Thedemand for labor in the Ukraine has moved away from unskilled manual labor andtoward skilled manual labor, but the shift is less pronounced than in other transition

economies of Central Europe. The demand for highly skilled professional workers is stillrelatively weak. Low returns to education and limited opportunity for higher wages fornon-manual skills (Patrinos 2007) are symptoms of the same phenomenon.

16 This percentage would probably be even higher if the informal sector were part of it. The informal employment sector is biased

in favor of manual and less skilled jobs (Lehmann and Pignatti 2007).


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Table 4. Structure of jobs created, jobs destroyed and vacancies, 2007

Firm characteristics

Share in:

Employment Job creationJob

destructionVacancies

Age-5 29.1 45.5 25.5 37.7

6 -10 22.0 18.7 21.8 20.4

11+ 48.9 35.8 52.7 41.9

Size

-50 26.4 28.4 53.6 47.9

51 250 17.8 18.6 15.0 17.7

251+ 55.8 53.0 31.4 34.4

Ownership

Private 74.1 74.8 86.5 85.5

State & communal 25.9 25.2 13.5 14.5

Economic activity

Industry 29.5 26.3 38.0 23.3Agriculture 5.2 2.1 16.7 4.3

Construction 8.0 9.8 4.7 31.4

Public services 0.5 0.0 2.3 0.4

Market services 56.8 61.8 38.2 40.7

Occupation

Managers Na 5.1 5.2 3.6

Professionals Na 2.2 4.0 2.2

Technicians Na 7.7 10.9 5.0

Clerks Na 2.1 2.7 3.3

Service and sales Na 4.9 6.7 5.0

Agriculture Na 0.2 1.0 0.5

Craftsmen andrelated trades Na 29.4 15.9 36.5Machine operatorsand assemblers Na 23.7 15.6 16.1Elementaryoccupations Na 24.7 37.9 28.0

Na = not available

Note: Net job creation rate = job creation rate job destruction rate = employment growth rate.

Vacancy rate = vacancies/employment (expressed as a percentage).


It is puzzling how the increase in market services employment squares with the

apparently weak demand for non-manual workers. Most of the new jobs were in themarket services industry. And yet,Figure 11 shows that relatively few jobs were createdin the service, sales and office occupations. Craftsmen, on the other hand, were in greatdemand. One explanation for this paradox is that the market services industry demandscraft workers; so does the construction industry. An electrician or a plumber can work inindustry or in services. The service industry may also employ workers in elementaryoccupations. Although many low skilled jobs are being destroyed, many are also beingcreated. High job turnover indicates low-skilled workers move frequently from one job


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to another. Many of these jobs appear to be in the service industry. Finally, manyworkers in the service sector are self-employed (independent contractors). The labordemand survey does not address independent contractors, it only covers employees.Consequently, the demand for non-manual workers may be underestimated.

Figure 11. Job creation and job destruction by occupation, 2007

Percentage Shares in Job Creation and Job Destruction

2007

0

5

10

15

20

25

30

35

40

45

Managers &

professionals

Technicians Clerks Service & sales Craftsmen Machine operators &

assemblers

Laborers

Job creation Job destruction


SKILLS MISMATCH

This section focuses on the skills mismatch. First, it examines the occupational structureof job vacancies to identify skills in short supply. Second, it discusses the disparitybetween the skills employers require and those that the unemployed possess.

Most vacancies are for manual workers in construction and manufacturing

Most vacancies are for manual workers. Most hiring takes place in the constructionand manufacturing industries. Four out of five vacancies in the Ukraine are for manual(blue collar) workers; one out of four vacancies is for unskilled manual workers (Figure

12). There is still a high demand for manual as well as unskilled labor but a limiteddemand for highly skilled labor. That does not necessarily indicate a shortage of lessskilled manual labor. A skills shortage occurs only if the demand for a given occupationis greater than the supply. Although the demand for less skilled labor is high in absoluteterms, the supply is even greater.


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Box 3 Job vacancies in the Ukraine

Data on job vacancies are critical for assessing the skills shortage. This report uses two differentsources of data: the Labor Demand Survey (LDS) and the State Employment Service (SES).Table A shows significant differences between these two sources. Vacancies in professionaloccupations account for a significantly higher share of all vacancies in SES data than in the LDS

data. Conversely, the share of vacancies in the trades and especially elementary occupations issignificantly higher in LDS data than in SES.

Table A. Percentage distribution of job vacancies by occupation

Occupation

State EmploymentService

Labor DemandSurvey Difference

December 2006 April 2007

Percent

Managers and senior officials 6.2 3.6 2.7

Professionals 8.5 2.2 6.3Technicians and associateprofessionals 9.0 5.0 4.1

Administrative workers 3.1 3.3 -0.2

Sales and service workers 8.5 5.0 3.5Skilled agricultural workers 1.1 0.5 0.6

Craftsmen and related trades 29.7 36.5 -6.7

Machine operators and assemblers 19.6 16.1 3.5

Elementary occupations 14.2 28.0 -13.8

Source: Labor demand survey, 2007; State Employment Service; Bank staff calculations.

Which source is more reliable? In principle, the survey data should be more representative thanthe administrative data. The survey reflects all (registered) firms in the Ukraine. In contrast,administrative data is generally biased. Although notification is obligatory, incentives to complymay be weak. In reality the vacancy penetration ratio (the percentage of all vacancies reported)never reaches 100% and varies by occupation. For example, firms rarely notify SES aboutvacancies for temporary (often informal) work. That may explain why this type of work isunderrepresented in the SES data. It is also likely that public sector enterprises and organizations(such as schools and health care units) are more prone to notify SES about vacancies than privatesector firms. As a result, vacancies for professional workers may be overrepresented in SES data.

The survey data may have their share of weaknesses too. Although the survey is representative,the sample size is relatively small. That increases the risk of sample bias and renders theestimates less precise (due to greater standard error).

A key advantage of the SES vacancy data is that it focuses on narrow occupational groups(ISCO88 4-digit groups). That makes the results more meaningful for policy purposes. Incontrast, the LDS data relate to broad occupational groups (ISCO88 1-digit groups). This data canonly contribute to a general analysis of the demand for labor by occupation. However, thislimitation on the LDS data is specific to the pilot survey; the sample size was intentionally small.If the sample size was sufficiently large, it would offer more detail about occupational groups.

Despite the differences, data from both sources are roughly consistent. Most of the job vacanciesin the Ukraine are in manual and less skilled occupations. Vacancies for craftsmen dominate bothdata sets.

Source:Bank staff analysis


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Figure 12. Job vacancies by occupation, 2007

Panel A

Percentage Distribution of Job Vacancies by Occupation

2007

28.0

16.1

36.5

5.0

3.3

5.0

6.2

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1

Managers and professionals

Technicians

Clerks

Service & sales

Craftsmen

Machine operators

Elementarty

Panel B

Percentage Distribution of Job Vacancies by Industry

2007

31%

23%

22%

12%

12%

Construction Industry Personal services Trade, hotels & restaurants Others


Figure 13 demonstrates that there is an excess supply of unskilled manual labor in

the Ukraine. The relative number of jobseekers with elementary skills is substantiallyhigher than the relative number of job openings in that category. Unskilled manualworkers would be unemployed even if the total number of vacancies was the same as thetotal number of jobseekers. There is also an excess supply of sales and service as wellas administrative and secretarial occupations. Even if the overall number of jobopenings increased, the job outlook for workers in these occupations would be limited.

An increase in the number of job openings would most likely tilt in favor of thoserequiring a higher level of skills.

At the same time there is a shortage of professional workers, especially highly

skilled manual workers. The proportion of vacancies requiring a high level of manualskills is significantly greater than the proportion of unemployed with these skills. Thatshould come as no surprise. The previous analysis based on employers perceptions also pointed to a shortage of workers in these occupations. Still, there is a remarkable


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consistency between results obtained from employers perceptions of skill shortages andthose from data on unemployment and job vacancies.

Figure 13. Skills mismatch: too few craftsmen and too many low-skilled workers

"Excess Supply" of Labor by Occupation

2006

-25

-20

-15

-10

-5

0

5

10

15

20

Managers Professionals Technicians Administrative Sales and

service

Skilled

agricultural

Craftsmen Machine

operators and

assemblers

Laborers

pct.points

Note: The figure shows which occupations have an excess supply of workers and which are in demand. Thepercentages reflect the net result after comparing unemployment and job vacancies by occupation. Apositive value indicates that the unemployment share is higher than the vacancy share, pointing to excesssupply. A negative value indicates the vacancy share is higher than the unemployment share, pointing tounmet demand.

Source: State Employment Service, Bank staff calculations.

While employers tend to seek highly skilled workers, low skilled workers predominateamong the unemployed

There is an excess supply of low skills and a shortage of high skills among manual

and non-manual workers in the Ukraine. This indicates a skills mismatch. The skillspossessed by the unemployed differ from those employers demand. In other words, thereis a fundamental gap in skills: the unemployed often lack what employers require. This,in turn, suggests that unemployment in the Ukraine has a significant structuralcomponent.

The exact nature of the skills gap in the Ukraine has yet to be defined. There is anexcess supply of workers in elementary and low-skilled occupations. We do not knowwhether the unemployed lack technical skills or soft skills, such as motivation, workhabits, ability to communicate and work with others, etc. (Box 3). These are important


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questions to address. What needs to come before a change in public policy? Anemployer-based skills survey or focus groups with employers.

17

The falling unemployment/vacancies ratio supports the idea that Ukrainian

unemployment comes from a mismatch of skills. When the unemployment/vacancy(U/V) ratio is high, unemployment is primarily due to a lack of demand for labor and a

lack of job opportunities. When the U/V ratio is low (and unemployment is above itsfrictional rate), this suggests the unemployed lack the skills employers demand.

18

Table 5

Thisstate of affairs is especially true of the long-term unemployed. Jobs are available, but theunemployed cannot take them because their skills do not match the job requirements.The same pattern exists in the Ukraine.

documents the decline in the U/V ratio -- in the aggregate and across

occupations. The fall in the U/V ratio is due to an increase in the number of jobvacancies and a drop in the number of unemployed. Since 2001, the number ofunemployed dropped by 25 percent; the number of vacancies increased by over 75percent. As a result, the U/V ratio fell from 10.6 in 2001 to 4.6 in 2006. The number ofvacancies has converged with the number of unemployed. The main issue is no longer alack of jobs, but matching the unemployed to jobs that are available.

The most spectacular fall in the U/V ratio occurred among administrative workers

and laborers. The U/V ratio for administrative workers fell from over 40 in 2001 to 8 in2006. For laborers it fell from 30 to 9 (Figure 14). In both cases the drop reflected astrong increase in the number of vacancies, that is, an increase in demand.

But despite the strong increase in demand for administrative workers and laborers,

the U/V ratio for both is still high. It is well above the average U/V ratio of 4.6. Thereis still an excess supply of less skilled manual and non-manual workers. Substantiallymore low-skilled workers are looking for jobs requiring simple blue collar or white collarskills. This demonstrates a skills gap in the Ukraine.

17 The English National Employers Skills Survey is a survey whose data sheds light on issues employers face: recruitment,

training and the skills gap. The surveys description can be found at http://readingroom.lsc.gov.uk/Lsc/National/nat-

nessurvey2007mainreport-may08.pdf18 Frictional (search) unemployment, a short-term phenomenon, is associated with workers who move between jobs or are entering

the labor market. Structural unemployment tends to be associated with skills or geographical mismatches that result from industrial

restructuring; it is usually long-term in nature.
http://readingroom.lsc.gov.uk/Lsc/National/nat-nessurvey2007mainreport-may08.pdfhttp://readingroom.lsc.gov.uk/Lsc/National/nat-nessurvey2007mainreport-may08.pdfhttp://readingroom.lsc.gov.uk/Lsc/National/nat-nessurvey2007mainreport-may08.pdfhttp://readingroom.lsc.gov.uk/Lsc/National/nat-nessurvey2007mainreport-may08.pdfhttp://readingroom.lsc.gov.uk/Lsc/National/nat-nessurvey2007mainreport-may08.pdf


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Table 5 Unemployment and vacancies by occupation, 2001-2006.

Occupation 2001 2002 2003 2004 2005 2006

Unemployment (2001 = 100)

Total 100.0 102.6 97.6 97.1 87.8 75.9

Managers and senior officials 100.0 102.1 94.9 103.4 103.9 102.6Professionals 100.0 90.9 80.2 69.5 64.1 58.5Technicians and associateprofessionals 100.0 95.3 84.5 73.5 62.9 54.2

Administrative workers 100.0 101.8 93.8 90.8 83.3 75.5

Sales and service workers 100.0 108.1 105.1 109.4 94.9 79.0

Skilled agricultural workers 100.0 129.9 139.9 139.9 119.7 109.3

Craftsmen 100.0 86.4 72.9 66.1 57.9 48.3

Machine operators and assemblers 100.0 97.9 89.6 83.1 81.8 73.8

Elementary labor 100.0 120.9 128.9 144.6 128.6 105.2

Vacancies (2001 = 100)

Total 100.0 127.9 143.3 171.9 192.6 175.9





Craftsmen 100.0 118.4 129.2 142.1 148.4 134.3



Unemployment/Vacancies ratio

Total 10.6 8.5 7.2 6.0 4.8 4.6





Craftsmen 4.4 3.2 2.5 2.0 1.7 1.6



Note: Registered unemployment; vacancies registered with the State EmploymentService.

Source: State Employment Service; Bank staff calculations.


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Figure 14. A uniform drop in the unemployment/vacancies ratio indicates that skills

mismatch (gap) plays an increasingly prominent role in employment

Unemployment/Vacanty Ratio by Occupation 2001-2006

0

5

10

15

20

25

30

35

40

45

50

Managers Professionals Technicians Administrative Sales and

service

Agriculture Craftsmen Machine

operators

Laborers

2001

2002

2003

2004

2005

2006

Source: State Employment Service; Bank staff calculations.

The evolution of the U/V ratio for skilled manual workers provides an interesting

contrast. Since 2001, the ratio made a modest decline which was in keeping with theoverall trend. (Figure 14). Skilled manual workers were in great demand even when the

aggregate demand for labor was relatively low. The current ratio of 1.6 is by far thelowest among all occupational groups. The implication is skilled manual workers are inshort supply, a finding supported by evidence from other sources (see above). Skilledmanual workers who are unemployed are either between jobs (frictional, short termunemployment) or they lack job readiness skills (structural, long-term unemployment).

The shortage of skilled labor may hinder the growth of firms and job creation in the

Ukraine. Expanding and modern firms tend to employ more skilled labor than shrinkingand traditional firms. Those that employ workers with a higher level of skill are morelikely to grow. There is a positive relationship between workforce skills and firm growth.Figure 15 illustrates the interconnectedness between the intensity of job skills and thegrowth of firms in the Ukraine. Nearly 50 percent of firms that are expanding in the

Ukraine employ highly skilled labor. In contrast, only 33 percent of firms that arestagnant or contracting employ highly skilled labor. Firms that are contracting are morelikely to employ less skilled labor than firms that are expanding. A firms human capitaland its prospects for growth are intertwined. Hence, if a high level of skills is in shortsupply, then a firms growth potential tends to suffer.


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Figure 15. Growing firms demand more skilled workers, who, in turn, contribute to

growth

Percentage Distribution Growing and Declining Firms by Human Capital Intensity

Ukraine, 2005

23.829.1

30.6

37.7

45.7

33.2

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

Expanding firms Non-exapnding firms

High skill intensity firms

Medium skill intensity firms

Low skill intensity firms

Expanding firms hire

more highly skilled

labor than firms that

are contracting

C

Documents

Ukraine Labor Demand 2009