This duality of the labour market is represented in Figure 2.4. Panel A depicts the more productive formal market sector in which equilibrium wage is Wfor* at a level of employment Efor*. While Panel B illustrates the more disadvantaged segment in which the equilibrium wage is Winfor* at a level of employment Einfor*.
Figure 2.4. Labour market segmentation
Source: Bosworth, Dawkins, and Stromback (1996, p. 199).
By comparing Panel A and Panel B, two aspects arise. First, labour demand and supply in the formal sector is comparatively more inelastic than the informal sector. This result reflects the fact that in the formal market there are more labour regulations (such as minimum wages, non-wage labour costs, etc.) and more training time, among other entry costs, that make supply and demand less responsive to changes in wages than in the informal sector. Second, wages in the formal sector are higher than in the informal (disadvantaged) sector (Wfor* > Winfor*); consequently, this outcome shows that there are incentives to be part of the formal sector. However, there are some barriers that prevent people from entering the more advantageous segment of the labour market.
The economic literature reveals several barriers that might explain this labour market segmentation (Reich, Gordon, and Edwards 1973). One of these barriers is that potential workers possess imperfect information about the skills required to fulfil employer requirements. Imperfect information might explain why some workers, even when there are incentives (e.g. higher wages) for them to belong to the formal segment of the labour market, remain outside of this more advantageous sector, while some vacancies remain unfilled.21 Thus, as Wfor* > Winfor* and the labour conditionsfor > conditionsinfor, there is an incentive for workers to develop the required skills to transfer from the informal to the formal sector, although doing so might take time.
2.4.2. Imperfect market information
As pointed out by Gambin et al. (2016), there are different causes of imbalances (imperfections) in the labour market. For instance, there might be capital constraints, uncertainty about future demand, labour market immobility, institutional barriers, etc., which prevent people from making investments in training or from mobilising workers to places or sectors that require certain skills. However, as previously mentioned, perfect information is one of the necessary conditions for the well-functioning of the labour market (but it is not a sufficient condition). This assumption supposes that all workers know the particularities (e.g. skills required, wages, among others) of all available jobs, and they only need to decide the quantity of labour (number of hours) offered that they are prepared to work, while firms know the characteristics of all potential workers and can choose the one who most suits their job requirements, and education and training institutions offer programmes that are aligned with employer needs. However, labour market failures arise due to imperfect information, which occurs when agents in the economy (in this case, employers, employees, and training centres) are not fully informed about the price or quality of the product they are going to buy or sell. Therefore, agents might not make optimal decisions (Stiglitz et al. 2013).
For instance, education and training institutions need to have up-to-date labour market information (e.g. skills and occupational requirements, number of people demanded, etc.) to design (curriculum contents, number of courses, etc.) and offer programmes that cover the needs of the labour market. However, training centres (usually) do not have the necessary means and resources to know employer requirements (see Chapter 3 and 4). Given the difficulties in obtaining proper labour market information, education and training providers cannot respond properly to labour market changes. As mentioned by Almeida, Behrman, and Robalino (2012), this lack of proper information prevents education and training programmes from being aligned with labour demand needs. Consequently, misaligned, outdated or low-quality curriculum contents will arise due to imperfect labour market information (see Chapter 3). People might not have the “right” skills, and companies might not find workers with the skill sets they need. Thus, limitation on information might create phenomena such as skill mismatches. In particular, skill mismatches occur when there is imperfect information in the job search process or in the workplace regarding the particularities of jobs; mismatches that misalign the labour demand and supply of skills (UKCES 2014). These phenomena can acquire different forms, such as skill gaps, skill surpluses, and skill shortages, with various consequences on the economy, such as unemployment, informality, job dissatisfaction, among others.
Once a job match is completed, employers might realise that their current employees need more skills to be completely proficient in their jobs; this problem is called a skill gap and is considered part of the phenomenon of skill mismatch.22 Nevertheless, the definition of skill gaps per se does not capture the entire skill mismatch phenomenon. For instance, a skill surplus might occur within workplaces. This term refers to a situation where a certain job does not require the highest level of an employee’s competences (Adalet McGowan and Andrews 2015). According to Green and Zhu (2008), graduate over-qualification (which is a way to measure skill surpluses) was about 33% in the UK in 2006. This underutilisation of labour supply creates a misallocation of education and training resources (money and time are invested in programmes not demanded by the labour market), as well as increases job dissatisfaction (people do not fully use the skills they possess: underemployment) and employee turnover, which might be due to a loss of pay from being over-qualified (Green and Zhu 2008; Okay-Somerville and Scholarios 2013).
However, given the multiple configurations that the skill mismatch problem encompasses and labour market data available to analyse an economy such as Colombia’s, hereinafter this study will focus on skill shortages. This term refers to issues that arise in the job searching process when there are no applicants, or the applicants do not have the minimum level of skills needed to carry out the tasks required by employers. There is a skill shortage when the labour supply lacks skills in relation to what employers currently demand to fill their vacancies (Green, Machin, and Wilkinson, 1998).23, 24
Claims of skill shortages have been made globally. For instance, the European Company Survey for Spring 2013 reports that around 39% of firms in Europe experienced difficulties in finding workers according to skill requirements (Cedefop 2015, p. 20). Similarly, the ManpowerGroup (a well-known international consulting firm) carries out a Talent Shortage Survey, where employers around the world are asked whether they have difficulties in filling their jobs (Mazza 2017). As reported in 2016, due to skill shortages, 40% of the companies interviewed worldwide faced difficulties to fill their vacancies (ManpowerGroup 2016). However, in countries like Colombia this phenomenon is even larger (as will be shown in more detail in Chapter 3).
The human capital framework in economics has developed different theories to consider the possibility of imperfect information, as well as to explain labour market outcomes in a more realistic way. The search and matching theory, for example, has become one of the most prominent theories to explain skill mismatches and their relation to unemployment (Andrews et al. 2008). This model states that vacancies and workers are heterogeneous in terms of one characteristic: skills. However, obtaining information about the price and quality of labour can be costly, and not everyone has access to this information, which is a limitation that might affect the behaviour of workers and firms.