Understanding replacement demand and skills shortages

Learning objectives

  • To examine the meaning of replacement demand.
  • To reflect upon skill shortages.

Replacement demand

News media frequently report stories about the rosy future for jobs in new and vibrant sectors, like bio-technology or robotics. On the other hand, jobs in areas like mechanical engineering are seen as part of the old industrial technology and in decline. Whilst true at a superficial level, this may conceal the reality in terms of future employment prospects.

To continue with the example of engineering, at one time, this industry sector employed around 5.5 million people in the UK, while biotechnology, although a fast-growing business, only employed around 21,000.

To a great extent, future job opportunities depend on replacement demand – the number of people leaving an occupation and thus creating a vacancy. Replacement demand can arise because of the age structure of an industry. Workers in engineering are older than in biotech (which has tended to employ young graduates) and therefore replacement demand is likely to be higher as a percentage of those employed. Of course, retirement is not the only factor influencing replacement demand. Other factors include the attractiveness of the job, the level of pay and the availability of other options.

Skills shortages

Skill shortages are another topic frequently in the news. The reasons for skill shortages are complex and not just an issue of shortage of skills, but occur because of a mismatch between jobs that are available and the expertise/training in the labour force.

The UK Employer Skill Survey (ESS) indicated that in 2013, some 15% of employers reported that they had employees with skill gaps, equivalent to 1.4 million staff or 5% of the workforce. At the same time, a large proportion of employers felt that they underutilise their workers’ skills, with 4.3 million people (16% of the workforce) over-skilled or over-qualified for their current roles.

Of course, skills shortages may also be just due to lack of opportunity for progression, poor pay and poor working conditions, for instance in the agricultural industry. In big cities like London, skills shortages may be aggravated by a mismatch between the pay level in an occupation and the cost of living, including housing and transport.

Further reading and reflection

Vector image of desk

Read our blog on replacement demand. An example of replacement demand data and discussion is on Cedefop’s Skills Panorama website.

The Telegraph has some interesting articles on skills shortages facing the UK, but for a detailed explanation read the NCVER  2007 report, What is a skills shortage?


Go to the next unit: LMI in career guidance: biased or impartial?