Skills Mismatch in the Labour Market: An Agent-Based Modelling Approach

This research analyses the skills mismatch dynamics in the labour market using an agent-based model which is grounded in economic theory. The findings show the persistence of skills mismatch due to cyclical and structural factors in the economy. The output analyses highlight the sensitivity of skills mismatch to the initial endowment or characteristics of skill demand and supply in the region. This result is further supported by assessing policy response of skills mismatch. Training and investment policies are studied and the findings suggest that if a policy suitable to the region is implemented it can result in a reduction of skills mismatch and an increase in social welfare of the economy. Sectoral analysis of skills mismatch for Essex care sector finds issues such as failure of wage adjustment and ability of wages to signal shortages causes the persistence of skills mismatch in the sector. The research further analyses the impact of peer effect on skills mismatch to find that peer effect does affect the matching process by changing the supply of skills in the economy. Causal effects of exogenous frictions are thus found to impact the job search process. Analysis of spatial frictions in a single region and two-region setting is also conducted. The key findings from the regional analysis suggest that a high growth neighbouring area can decrease total skills mismatch of the system and of the local labour market but it comes at the cost of migration of high skilled workers to the neighbouring region leaving the local area pre-dominantly low skilled. Spatial frictions measured by commuting cost does not significantly impact these dynamics. The importance of regional and sectoral disaggregation while assessing skills mismatch and the measure of skills mismatch are recognized as the key considerations while designing policies aimed at addressing the labour market skills mismatch.