Challenges of labour shortages and skills provision

AuthorS: Eva Maersk and Gustaf Norlén
DATA AND MAPS: Gustaf Norlén

Labour shortages, high employment rates (see Chapter 4) and difficulties in recruiting are indicative of a tight labour market in the Nordic Region. In fact, labour shortages have been a hot topic and a major challenge for many countries, regions and municipalities in the last couple of years. While policymakers across the Nordic Region and Europe have sought to address this issue via educational initiatives and labour market reforms (Kananen 2012: Poutanen 2023), ‘skills mismatch’ and ‘skills shortages’ have been identified as important barriers to growth in the Nordic labour markets.

Concepts such as ‘skills matching’ and ‘skills provision’ position the problem as stemming from a mismatch or lack of balance in the skills of graduates, usually young people, who are deemed either over- or undereducated (Næss & Wiers-Jenssen 2023) relative to the needs of companies. However, while research shows that ‘skills matching’ is indeed an important, even crucial, component of an active labour market, researchers also point to labour shortages in general and skills provision in particular as complex, often inter-disciplinary issues (McGuinness et al. 2018), and that the responsibility for finding solutions ‘should fall onto job seekers, schools and employers’ (Brunello and Wruuck 2021: 17). This makes it difficult not only to assign responsibility but to identify and implement policy strategies.

The scale of the labour shortages and their high degree of geographical, social and sectoral diversity (Alsos and Dølvik 2021) further illustrate the complexity of this issue. At the same time, the shortages illuminate the strong links to broader demographic (mega)trends in the Nordic Region (Rauhut et al. 2008), as well as digitalisation (Randall et al. 2018) and the green transition (Lee et al. 2019). However, new research is focusing on solving the problem of skills mismatch through upskilling and reskilling, usually with an emphasis on older employees (Li 2022). This highlights an important generational dimension in skills provision. In other words, the problem of labour shortages should be addressed carefully and with a high degree of awareness of the different perspectives – from demand to supply to generations and geography.

In this chapter, we focus on ‘skills matching’ and ‘skills provision’ from a perspective of educational planning, as well as demographic and generational differences in a labour market characterised by correlating megatrends and rapid change. The chapter starts with addressing the issue of labour shortages and the situation right now. The focus is then shifted to the factors behind labour shortages and the mismatch between supply and demand in the labour market, with a special focus on the role of education and training.

While the differences in labour shortages are spread across sectors, age and geography, the Nordic labour markets as a whole are characterised by very high employment rates. As described in Chapter 4, the distribution is, with a few outliers, closely linked to the urban-rural divide – with the highest employment rates found outside of urban areas and the highest unemployment rates found in rural areas, e.g. in the eastern regions of Finland. In general, the trend of declining numbers of employed people in rural areas is expected to continue due to rising retirement rates in the majority of the municipalities. Combined with the accelerated need for digitalisation since the pandemic, geographical inequalities are contributing to challenges in certain areas and sectors (see Chapter 4).  

Apart from the aftermath of the financial crisis, the pandemic has had the biggest impact on both employment rates and shifting trends in job creation, which reflect the needs of the digital transition. However, the impact seems to be unevenly distributed between sectors. During the pandemic, employment fell in the transport, tourism, accommodation and food service sectors in all of the Nordic countries. Employment in accommodation and food service has bounced back in all of the countries since 2020. The biggest relative increase was in Finland and Norway (+0.7 percentage points). In addition, the widespread difficulties in recruiting qualified employees to match the needs of the construction industry, ICT and healthcare have been raised not only in the Nordic Region (OECD 2021) but across the EU as a whole. The 2023 Employment and Social Developments in Europe report (European Commission 2023) concludes that labour shortages will not only persist but get worse at all levels of skills and education in the next few years. This calls for solutions to the labour supply that are tailored to specific sectors and specific places in the future.

As many Nordic local labour markets have very low rates of unemployment, the real additional labour supply is to be found in groups that are currently outside of the labour market, i.e. those that are neither in employment nor looking for a job. In most of the Western world the working-age population is decreasing (here defined as 20–64 years). In the EU, this age group is expected to decrease by 6.5% between 2023 and 2040. Only five EU countries – Malta, Luxembourg, Ireland, Sweden and Belgium – are expected to enjoy growth in the working-age population during this period. However, in the Nordic Region as a whole, the working-age population is expected to grow slightly, with an average increase of 1.9%.

As Map 5.1 shows, the distribution is quite varied, with considerable differences both between and within the countries. The biggest increase is expected in Iceland (28%), followed by Sweden (5.8%), Åland (3.9%) and Norway (0.6%). Decreases are expected in Finland (-0.5%), the Faroe Islands (-2.6%), Denmark (-3.2%) and Greenland (-11.4%). This development is in addition to the decreases already experienced by Finland since 2013 (see Chapter 4).

In general, the trend of growing populations in cities and decreasing populations in rural areas is expected to continue. The regions that are expected to have the highest working-age population growth include Höfuðborgarsvæðið in Iceland, Uppsala (+13%), Stockholm (+12%), Skåne (+9%), Halland (+7%) and Västra Götaland (+6%) in Sweden, Uusimaa (+8%) and Pirkanmaa (+5%) in Finland, and Oslo and Viken in Norway (+5%). In addition, Copenhagen municipality (+5%), Rødovre (+9%) and Vallensbæk (+6%) in the Hovedstad region in Denmark are expected to see significant increases. However, it is expected that the working-age populations in most municipalities in the Hovedstaden region will decline. The Finnish regions of Satakunta, Etelä-Karjala, Kainuu, Kymenlaakso and Etelä-Savo and Greenland are all expected to see a decrease in the working-age population of more than 10%. Across the Nordic Region as a whole, it is expected that rural municipalities will see a 5.8% decline, whereas the urban municipalities will grow by 7.3%, and the semi-urban municipalities will have a stable labour supply. This trend will be further accelerated by developments in the average age of employees.

Figure 5.1 shows the age of employees across the whole Nordic Region in 2022. Most notably, many in the age group 65–69 are still employed, even though most have reached the qualifying age for retirement (the earliest being 62 in Sweden and Norway; the latest, 67 in Denmark). The qualifying age for retirement is rising in most of the Nordic countries due to economic concerns and increased longevity. These factors may also explain why more women and men over 70 are still working.

In the other age groups, there are more men than women working. The difference is most pronounced in the younger ages which might be explained by the fact that women, in general, start working later than men after participating in tertiary education. In terms of the future Nordic workforce, those aged 55–59 are the most interesting, as they are, at present, the biggest group in the workforce, but many of them will retire within the next decade. This will not only leave vacant spots to be filled, but is likely to increase the imbalance between urban and rural areas, as finding the labour supply to replace this group will be a significant challenge for rural regions.

Map 5.2 shows the ratio between the age groups 20–29 and 55–64 at the municipal level (big map) and regional level (small map). This indicator compares those entering the labour market and those exiting it. A ratio of 1 means that there are equally as many people in the age group 20–29 as in the age group 55–64. A ratio of less than 1 means that fewer people are entering than exiting the labour market. A ratio of more than 1 indicates that more are entering than exiting.

For the Nordic Region as a whole, the ratio is 0.95, meaning that there are slightly fewer people in the age group 20–29 than 55–64. Iceland is the only country with a ratio above 1 (Iceland: 1.3; Greenland: 0.99; Denmark: 0.97; Norway: 0.95; Finland: 0.94; Sweden: 0.93; Faroe Islands: 0.88; Åland: 0.63). All of the Icelandic regions, as well as the capital regions of Norway, Denmark and Finland, have a ratio above 1. In Sweden, the highest ratios are in Uppsala (1.25), Västerbotten (1.14) and Östergötland (1.03), while the ratio in Stockholm is below 1 (0.95). The lowest ratios are found in Etelä-Savo (0.62) and Åland (0.63) in Finland, Sjælland (0.63) in Denmark, Västernorrland (0.74) in Sweden, and in Vestfold og Telemark (0.78) and Viken (0.77) in Norway.

However alarming these trends and developments are, they are neither new nor undescribed. An analysis of the factors and policy strategies that are influencing these developments enables adjustments to be made to future trends.

The current mismatch can be at least partly attributed to the knock-on effects of the last 20 years of educational planning in the Nordic Region and the EU. In the last three decades, the Nordic system of post-secondary education attainment has changed significantly. While university degrees were previously almost exclusively attained by a small, often elite and primarily urban group, they are now obtained by more than 40% of people aged 25–34 (Eurostat 2024). In other words, the entire education system is moving towards massification and widening participation (Finn & Holton 2019). This change is substantial but not unforeseen.

In 2021, the Council of the European Union approved the ‘Resolution on a strategic framework for European co-operation in education and training towards the European Education Area and beyond (2021-2030), which includes a target that at least 45% of people aged 25–34 years should have gained a tertiary educational qualification (a Bachelor’s or Master’s degree) by 2030. This benchmark originated in the EU’s early ‘Education and Training’ strategies, most notably the ‘Bologna process’ (The Bologna Declaration 1999), which set a benchmark of 40% of persons aged 25–34 should have tertiary educational attainment in 2020. In 2022, the Nordic countries reached the 2030 target level for the share of people aged 25–34 with a tertiary qualification (Norway: 55.6%, Sweden: 52.4%, Denmark: 49%, Finland: 40.7%, Iceland: 40.2%) (Eurostat 2024).

At the same time, vocational training has not been a part of the strategic benchmarking of EU educational policies until recently. While initiatives have been implemented across the Nordic Region (see Nordic Council of Ministers 2023) these attempts have been sporadic. Only recently have vocational education and life-long training received the same status as higher-education benchmarking (Agostini & Capano 2012). Newer policy initiatives focus primarily on gender segregation in the Nordic vocational education and labour market sector (Nordic Council of Ministers 2022). While policymakers across the Nordics have worked to address this issue, research and grey literature point to several correlating factors, like physical conditions at vocational training institutions (DEA 2022) and experiences of unattractive working environments (Burr 2021). Social conditioning is another factor, i.e. parents encouraging their children to reach a higher educational level than they themselves achieved. This often includes an aspect of gender bias, as parents are far more likely to encourage sons rather than daughters to pursue vocational education (Reisel et al. 2019). This gender segregation, in terms of occupational choice, is seen across the Nordic labour markets (see Chapter 4). 

An ageing population – the so-called ‘greying of Europe’ or ‘the “agequake” of the Nordics’ (Hörnström & Roto 2013) – is not a new phenomenon. In 2019, the OECD identified the ageing population as one of the most important factors in relation to future labour shortages (OECD 2019). An ageing population also means increasing healthcare needs and more support jobs, which coincides with a decreasing number of younger people who choose for an education and careers in healthcare or similar areas.

Most of the Nordic countries have implemented reforms aimed at making ‘welfare education’ accessible and attractive in response to future demographic challenges. Another strategy has been to digitalise the health sector throughout the Nordic Region (see Lundgren et al. 2020). However, this does not appear to be turning the tide due to long-term demographic changes as Map 5.1 shows that a majority of Nordic municipalities will experience a declining number of people of working age in the run-up to 2040. There will also be major differences between municipalities, with rural municipalities throughout the Nordic Region experiencing more than a 25% decrease in working population, while most urban or semi-urban areas will experience a minor decrease or increase (between -2.5% and 2.5%). This means that more attention needs to be paid to demographics and the multi-generational effects on the labour supply.

Automation, digitalisation and technological adaptation are three of the most important drivers for labour market changes globally and in the Nordic Region (Eriksson & Andersson 2023). The Nordic Region is at the forefront of efforts to maximise the potential of digitalisation and digital integration, e.g. via the Nordic-Baltic declaration aimed at enhancing co-operation on digitalisation (Nordic Council of Ministers 2017). Accessing the skills and employees necessary for this transition is crucial for both national and regional development (Berlina & Randall 2019).

From an international perspective, the World Economic Forum estimates that the three most important labour market competences in the next five years will be creative thinking, analytical thinking and technological literacy – and that six out of ten current workers will need additional training in these skills (‘The Future of Jobs’ 2023). At the Nordic level, Eriksson & Andersson (2023) identify an increasing need for social and digital skills and note that this trend is also influenced by the disruptions and innovations that emerged during the Covid-19 pandemic.

This trend has both positive and negative impacts on the Nordic countries. Overall, more than half of the workers in the Nordic Region (54%) are employed in high-skilled occupations. Based on data on employment by occupation, Eurostat defines ISCO classes 1–3 as ‘high-skilled’ labour. This includes the groups' managers (ISCO 1), professionals (ISCO 2) and technicians and associate professionals (ISCO 3).

Map 5.3 displays the share of high-skilled workers (ISCO 1-3) as a share of the total number of workers (ISCO 1-9). The EU average of high-skilled workers is 43%, and the Nordic countries are at the top of the rankings – 49.5% in Finland, 51.1% in Denmark, 54.2% in Norway, 54.5% in Iceland and 58.9% in Sweden.

On a regional level, the highest share is in the capitals and bigger cities, such as Stockholm (72%), Oslo (71%), Hovedstaden (Copenhagen) (60%), Uppsala (60%) and Uusima (Helsinki) (59%). The lowest shares are in the Finnish regions of Etelä-Pohjanmaa, Keski-Pohjanmaa, Satakunta and Etelä-Savo (less than 40%). However, this does not necessarily mean that employers will have a greater chance of successfully recruiting high-skilled workers in the future, partly because those in this group already have jobs and partly due to generally lower investments in education (Agostini & Capano 2012).

Given the range of factors contributing to the skills mismatch and the various challenges associated with specific sectors and geography, labour shortages, in general, are not easy to measure or address. One way of looking at the unmet demand for labour is through the job vacancy ratio, which measures the number of vacant positions as a share of the total number of positions (vacant and occupied). Figure 5.2 shows a major increase in job vacancies after the pandemic. This was particularly pronounced in Norway, which also had a high job vacancy ratio for a longer period, indicating a structural imbalance between supply and demand.

As Figure 5.2 shows, there are signs that the job vacancy ratio may be in decline, which suggests that the hot labour market may be approaching its peak. There are already reports of a slower labour market in sectors such as construction and trade. The labour shortage related to the megatrends is not affected in the same way – this includes the demand for healthcare and other care workers related to the ageing population. Technological change, too, implies a need for new skills, including new jobs created in relation to the green transition. More attention must be paid to these factors and how they both affect and produce the labour shortage.

The successful implementation of the Bologna Process and the derived increase in educational levels of young people in the Nordic Region coincides with large numbers of the ‘baby boomer’ generation leaving the labour market. This generation has a significantly lower level of education than the current 24–35 age group – i.e. those who are now entering the labour market. This trend can be seen across the Nordic Region.

All of the Nordic countries have a higher share of people who completed tertiary education than the EU average. The highest share is in Sweden (48.6%), followed by Norway (47.8%), Iceland (42.9%), Finland (42.7%) and Denmark (42.1%). Finland has the highest share of vocationally trained people (38.8%), followed by Denmark (32.4%).

Looking more closely at the data reveals a generational stratification of educational levels. Data from Eurostat shows that, in 2022, it was far less common for younger people (25–34) to be vocationally trained (level 4) (DK: 22%, NO: 19.4%, ICE: 15.0%, SWE: 22.4% and FIN: 37.3), compared to older age groups (DK: 40.8%, NO: 31.5%, ICE: 32.6%, SWE: 34.1% and FIN: 43.5%). The highest shares of vocationally trained people are in the Finnish regions, followed by Nordjylland, Sjælland and Syddanmark, all of which are higher than the EU average.

The lowest shares are in the capital regions of Stockholm (17%) and Oslo and Viken (19.6%). When a decreasing number of people obtaining a vocational education correlates with an increase in vocationally trained employees leaving the labour market, a ‘skills mismatch’ gap occurs. Young people now have a higher chance of graduating with a Master’s degree than previous generations – which also means that they have a lower chance of only acquiring a primary or lower secondary education. This tendency can be interpreted in multiple ways. While some researchers have deemed this process to be an example of ‘degree inflation’ (Van Damme 2022), others point to structural inequalities, low salaries and physically demanding jobs (DEA 2022) or young people being heavily influenced by both their parents’ socioeconomic status and their early experiences at school (Larsen 2017). These factors result a reproduction of social norms where vocationally trained young people tend to stay outside of urban regions, as opposed to academically oriented young people who tend to leave rural areas for cities (Maersk 2022).

Map 5.4 of tertiary education attainment shows a very different distribution of skills related to education, as well as big differences both within and between the countries. There is a big urban-rural divide in terms of tertiary education, with the capital regions of Oslo (66%), Stockholm (58%), Copenhagen (Hovestaden) (51%), Reykjavik (51%) and Helsinki (Uusimaa) (49%) standing out with particular high share of tertiary educated population. Conversely, rural regions such as Iceland outside of Reykjavik (30%),  Kymenlaakso (34%), Kainuu (34%), Etelä-Savo (35%), Satakunta (35%) in Finland and Syddanmark (35%), Midtjylland (36%) and Nordjylland (36%) in Denmark are among the regions with the lowest share of tertiary educated population.

Due to the generational skills gap, the concepts of lifelong learning, upskilling and reskilling have attracted renewed attention. Lifelong learning has received increasing recognition over the last ten years for its potential in the areas of educational and workforce policy development across the EU and the Nordic Region.

The World Economic Forum estimates that more than 1 billion people worldwide need to be reskilled by 2030 to meet the needs of the rapidly changing labour markets. However, the concept of lifelong learning is still fairly vaguely (or at least broadly) defined, including in the Nordic countries. According to Eurostat, ‘Lifelong learning encompasses all learning activities undertaken throughout life with the aim of improving knowledge, skills and competences, within personal, civic, social or employment-related perspectives. The intention or aim to learn is the critical point that distinguishes these activities from non-learning activities, such as cultural or sporting activities’ (Eurostat).

In a Nordic context, lifelong learning often refers to adult learning, usually in the form of enhancing (often ‘low-skilled’, see, e.g. Helsinger et al. 2023) adults’ basic skills through formal education, or via ‘reskilling’ or ‘upskilling’. The concept’s unclear definition makes it difficult to analyse the current state of the Nordic Region as a place of lifelong learning. Reskilling and upskilling are usually measured and tracked within specific sectors (see, e.g. ‘The EC Skills Agenda 2020’, which focuses on reskilling within the green and digital transitions, or the Association of Nordic Engineers’ analysis of Nordic digital upskilling initiatives (Schmidt 2021). Based on Eurostat’s broad definition, lifelong learning can be measured through ‘participation in all purposeful learning activities, whether it is formal, non-formal or informal’. However, when we apply this definition to Eurostat’s data, there is no clear evidence of any increase in participation rates in education and training since 2013 (see Figure 5.4).

Unpacking the nuances, underlying concepts and trends related to skills mismatch and labour shortages highlights the complexity of the problem and the need for solutions that are sensitive to demographic, spatial and temporal changes and paradoxes. The problem of attracting healthcare workers is much greater in rural municipalities than in urban ones, but the challenges seem to vary between rural municipalities, too. Educational levels differ not only between generations, but also by geography and educational field. In addition, while labour shortages have attracted increasing political attention, the number of people outside of the labour market seems to be decreasing, albeit minimally and slowly. Even though demand for labour is historically high, people outside of the labour market often face multiple barriers on their way to employment. New research shows that 21% of potential members of the workforce in the Nordic countries have ‘little or no connection to the labour market’. In particular, young people, older people, people with disabilities and immigrants are at risk of losing their attachment to the labour market (HBS Economics and VIVE 2022). While the analyses and cases presented here highlight the need for local, regional and national innovation, including these groups will play a pivotal role in dealing with labour shortages more broadly.

In other words, labour shortages are due to various correlating (mega)trends, which take different forms according to the place and context in which they occur. However, they also highlight the significant potential and paradoxes that arise when labour markets make only incremental changes in relation to inclusion and innovation within lifelong learning and upskilling. The relatively small cohort of younger people entering the labour market will increase competition for skilled workers and is likely to lead to a new normal in which the attractiveness of workplaces is a key factor. As the qualifying age for retirement increases, young graduates are already planning to take ‘gap years’ and breaks throughout their working life instead of at its end. All of these considerations mean that more innovation is needed – not only for the green transition but throughout the labour market as a whole. Given the long gestation period of educational reforms, the Nordic Region will not solve the challenges of labour shortages through traditional educational means alone, regardless of how successful such initiatives may be. Instead, lifelong learning, as a way of exploring or increasing skills while remaining outside of traditional education systems, can be a guiding light for new forms of informal and formal skills enhancement that match the needs of the labour market. While upskilling and reskilling are, at first glance, much and more dynamic than traditional obtainment of education, this approach also requires that companies make a greater contribution than the Nordic social contract traditionally expects of them. Exploring the potential of lifelong learning and the underlying paradigm shift will require new strategies in terms of collaboration and division of responsibility between private-sector companies, educational institutions and actors within the public sector.

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