Skill Demand, Skill Supply, and the Prevalence of Skill Mismatch in the European Union

Pillars Report

Labor market developments such as globalization, structural transformation, and accelerating technological change can lead to mismatches between firms’ skill demand and employees’ skill supply. While skill mismatch is heavily discussed in research and policy, empirical evidence on the existence and determinants of skill mismatch in Europe is very scarce. In this paper, we develop novel measures of skill mismatch in Europe to address various questions of high relevance for labor market policies in the European Union: (1) How prevalent is skill mismatch in Europe? (2) What are the drivers of skill mismatch and how can workers better prepare for the skill demand of employers? We draw on innovative online job ad data and skill survey data for 17 European countries to measure skill demand and supply, respectively. Applying modern machine learning techniques to link the demand and supply data, we develop new measures of skill mismatch that allow us to investigate mismatch across occupations, skill domains, gender, industries, and regions.

We document that skill mismatch is a widespread phenomenon in Europe, while the extent and direction of mismatch varies across occupations and regions. We also show that skill mismatch across European regions exists at two margins: First, the skills current workers possess do not match the skills demanded by employers (intensive margin). Second, the number of early-career workers who are qualified to work in certain occupations is not sufficient to fill the vacancies in these occupations (extensive margin). We further study skill mismatch at the regional level and its relationship to economic, industrial, and structural characteristics. We show that more prosperous and more dynamic regions systematically face less skill shortage, while regions more exposed to technological change (in particular, automation) are more severely affected by skill shortage. At the same time, the prevalence of on-the-job training reduces skill shortage, pointing to the role of education and training systems to ensure the employability of the workforce in Europe.