Friday, November 03, 2006

Professional Services and the Demographic Time Bomb

In two posts (here and here) on my managing the professional services firm blog I looked at the implications of demographic change for the professions, following up earlier posts on this blog.

In discussing these issues I have tried to drop below the general discussion on the aging population (for a good overview of the broader global discussion see the demography matters collective blog) to look at specific implications.

In the case of professional services broadly defined (all the professions and para-professionals), my present conclusion is that given continued economic growth, shortage of people is likely to be the single greatest strategic challenge facing all firms and organisations over the next ten years. While the Federal Government has taken some action to increase places in specific areas, it is now too late in my view to avert the problem.


Anonymous said...

India seems to have a surplus of professionals who speak English. We could just solve all our problems with a massive immigration problem. Remember the solution mid 20th century was massive immigration to provide the resources of unskilled labour for manufacturing. The Snowy Mountain Scheme was manned by immigrants for example. Doctors from overseas are now filling in the gaps of a shortage of GP's.

Jim Belshaw said...

In a sense, this (migration) is just what we are trying to do at the present time through the skilled migration program.

Leaving aside the question of whether or not we should (for example I am uncomfortable about simply pinching doctors from countries with their own needs), the problem of skills shortages combined with aging is not unique to Australia. I just don't know whether in fact the people we want are there across all professions.

There are some interesting dynamic issues here that I do not fully understand. There are now over 800,000 long term Australian expatriats apparently concentrated in the younger professional group. We appear to be losing one professional for every two we recruit.

Germany, whose aging population problem is larger than ours,appears very close to suffering net migration, especially concentrated in the professional cohort. Some countries, US and Sweden and so far Australia, are gaining from other's brain drains. But we too have a net brain drain in some areas.

Maybe I will get to understand all this some day!

Travel Italy said...

I think we are missing the underlying cause of shortages and long term economic stability.

Cowboy Capitalism creates excesses in markets and tremendous swings as all economies and markets attempt to find the median.

Individuals have different priorities than economies thus individuals move and flow to their perceived best interest. Free Markets are based on enlightened self interest. The enlightened part has been lost as self interest allocates resources.

A simple example: Executives get paid huge bonuses for increasing margins. They move jobs to a perceived lower cost producer. Individuals see their wages drop. They change sector. The company then realizes that they need to increase home production to maintain quality or expand facilities to avoid losing market share. They look for employees from markets they previously decimated. There are no available workers at the pay scale the companies are willing to pay. Ahhh there is a shortage, "We need to have better qualified employees, we need immigrants, we to work on education," are cries that come from corporations when, in reality, they are the cause of their own malice.

I am not for big government or excessive regulation but I do think that government needs to place the "enlightened" part back into the equation otherwise we will continue in this terrible downward cycle.

The recent law passed in Italy concerning the use of wood chip in winemaking is a great example. Had the government not intervened Italian wines would have lost their competitive advantage as producers tried to increase margins and compete with outside influences.

Travel Italy said...

A note: in the previous comment, Italy's competitive advantage that is protected is quality!

Anonymous said...

Jim, your figure of 800,000 expats, probably a large percentage being professionals. This makes me wonder what effect the HECS system has in encouraging graduates to move overseas, thus avoiding the huge repayment burden placed on them. What David is describing is globalization as individuals practice it, and isn't limited to multi-national corps.

Jim Belshaw said...

Lexcen, I am sure that HECS is a factor, although a lot of things come into play so I do not know how much weight to place on HECS. However, there is an interesting process here that bears upon David's comments re enlightened self interest as well as my later public administration notes.

By way of background for David, Australian universities used to charge fees intended to cover most course costs. Government scholarships were then provided to assist people to go to university.

The Whitlam Labor Government abolished university fees. This was at the start of the economic troubles of the 1970s and proved unsustainable in budget terms. So for this reason as well as changing ideology, we now have a mix of Government subsidised (HECS)places in which the student pays part of the cost back later through income tax with full fee places.

Part of the argument for HECS/student loan approaches lies in the fact that higher education provides an income premium to individual as well as broader benefits to the economy and society. So, the argument runs, students should pay a price related to the income benefits they get.

So far so good. However, some interesting variables come into play.

In theory, the Government should provide HECS places up to the limit of student demand in the mix required by that demand. If the consequence is greater cost than the Government is prepared to meet, then required HECS contributions should be increased to ration demand.

In practice, Government sets the number of places. When Government gets it wrong things can go very wrong as happened in the case of doctors.

Because HECS is a price that also varies between courses, it obviously affects demand for places in general and between courses.

In theory, the HECS price should be set at a level that will extract a return for the direct personal income benefit attached to the course adjusted for income tax while also preserving the broader public good contribution to the broader economy and community. But how to calculate this? Get it wrong and you reduce the national benefit.

Cost of delivering courses varies with no clear relationship between subsequent income and course costs. To the degree you set a HECS price based on input costs, you may choke of just those people (scientists, for example) that you want to encourage.

In theory, HECS is equitable in that it is open to all. In practice wealthier students/parents pay up front to get the discount leaving poorer students carrying the longer term load.

Finally, and returning to your point, both Government and economy only get a return if the student stays in the country. Set the HECS price to high and people shift.Mind you, if we then get migrants who someone else has paid to train, this may balance out.

One of the key lessons I learned as a policy adviser was the need to be aware of perverse and unexpected results.

David, I think that you have captured the problem very well. I have posted a comment on the Italian example.

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