RESEARCH OF LONG-TERM FORECASTING SYSTEM OF THE LABOR MARKET DEMAND AND ANALYSIS OF IMPROVEMENT OPTIONS

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1 PROJECT RESEARCHES OF THE MINISTRY OF WELFARE OF THE NATIONAL PROGRAM LABOR MARKET RESEARCHES OF THE EUROPEAN UNION STRUCTURAL FUNDS No. VPD1/ESF/NVA/04/NP/ /0001/0003 RESEARCH OF LONG-TERM FORECASTING SYSTEM OF THE LABOR MARKET DEMAND AND ANALYSIS OF IMPROVEMENT OPTIONS The research has been performed with a 75% financial support from the European Union University of Latvia Institute of Development Projects Riga, 2007

2 UDK 331.5(474.3) Da 620 Research of Long-Term Forecasting System of the Labor Market Demand and Analysis of Improvement Options. LR LM: Riga, 2007, XII p. Project manager: Ludmila Frolova Researchers: Inta Krūmiņa, Pēteris Rivža, Evija Kopeika, Irina Arhipova, Inguna Ieviņa (Ruža), Jekaterina Meļņikova, Kristīne Rozīte, Ilona Ozoliņa, Baiba Rivža, Grigorijs Oļevskis, Oļegs Barānovs, Ārija Konstantinova, Nataļja Berezina, Ināra Kantāne, Anda Vītiņa, Jānis Hofmanis, Ilona Tole, Elīna Ērmane, Inga Šķendere-Drēģere, Jūlija Stare, Agnese Briška, Ivars Eglājs, Ritvars Briska, Ieva Vērzemniece, Jānis Briedis, Roberts Mencis, Baiba Berovska, Laima Levanoviča, Kristaps Āboliņš, Mārtiņš Šķiņķis, Iluta Bērziņa, Sanita Vetšteina, Agnese Jacino. Editors: Ināra Mikažāne and Anna Šmite Computer composed matter: Ludis Neiders Cover design: Uldis Freimanis LR Labklājības ministrija, 2007 ISBN

3 The Group of Researchers The research demand and analysis of the improvement options of the project Researches of the Ministry of Welfare No. VPD1/ESF/NVA/04/NP/ /0001/0003 of the National program Labor Market Researches of the European Union structural funds was performed by the University of Latvia, under supervision of the Dr. habil. oec. Ludmila Frolova, in coordination with the research partner SIA Institute of Development Projects. Ludmila Frolova, the leader of the research group, is a professor at the University of Latvia, the director of the Economic bachelor and master degree study programs at the Department of Economics and Management. The most significant prior research experience of Ludmila Frolova is related to mathematic modeling and forecasting of economic and managerial processes. During the research, the University of Latvia was represented by the following researchers: Inta Krūmiņa, Pēteris Rivža, Evija Kopeika, Irina Arhipova, Inguna Ieviņa (Ruža), Jekaterina Meļņikova, Kristīne Rozīte, Ilona Ozoliņa, Baiba Rivža, Grigorijs Oļevskis, Oļegs Barānovs, Ārija Konstantinova, Nataļja Berezina, Ināra Kantāne, Anda Vītiņa, Jānis Hofmanis, Ilona Tole, Elīna Ērmane, Inga Šķendere-Drēģere, Jūlija Stare, and Agnese Briška. SIA Attīstības projektu institūts during the research was represented by the following researchers: Ivars Eglājs, Ritvars Briska, Ieva Vērzemniece, Jānis Briedis, Roberts Mencis, Baiba Berovska, Laima Levanoviča, Kristaps Āboliņš, Mārtiņš Šķiņķis, Iluta Bērziņa, Sanita Vetšteina, and Agnese Jacino. Within framework of the research, an employer survey was performed, which was implemented by SIA InMind (currently SIA GfK Custom Research Baltic ). However the quantitative employer survey was performed by SIA Latvijas Fakti. iii

4 Summary Currently in the Republic of Latvia there is no one uniform and coordinated medium term and long-term labor market supply and demand forecasting system, according to which the labor market development policy could be based. Within the framework of the given research, the necessary statistical information was acknowledged for establishing the labor market supply and demand, as well as analytical and forecasting methods for ensuring conformability of the labor market supply to the demand were elaborated. The researchers elaborated and approbated the statistical models and innovative dynamic optimization model for forecasting the supply and demand and for simulator modeling thereof. Information technology solution and implementation plan of improvements to the institutional system, which is necessary to be implemented for practical application of the forecasting models, was elaborated during the research. Implementation of the obtained results will form an option to use the state budgetary resources more purposefully (for instance, when planning the study positions), to implement new labor market measures and/or complete the existing measures with more justification, to describe the causes of problem origination in the labor market more exhaustively. Key words: labor force, supply and demand, modeling, optimization, imitating modeling, information technology solution, institutional system. iv

5 Table of Contents Table Index...vi Figure Index...vii List of Abbreviations... viii Terminology Definitions...x Introduction General Conclusions and Proposals Literature Review Review on Legislation and Policy Documentation Review on Data and Previously Performed Researches Development of Research Approaches Research Methodology Research Results The Practical Application Spheres of the Labor Market Forecasting System to be Created Evaluation of the Existing Labor Market Forecasting System Data Obtainment Model Data Summarization and Processing Model Model Construction Evaluation and Interpretation of the Results Plan of Improvement/Implementation of the Labor Market Forecasting System IT Solution Requirements Conclusions and Recommendations Most Significant Decisions and Matters, in Consideration of which the Forecasting System to be Created can be Used Optimum Degree of Detailed Elaboration and Sections for Establishing the Labor Force Supply and Demand Necessary Statistical Information for Determining the Labor Force Supply and Demand Recommended Analytical and Statistical Forecasting Methods Causes of Nonconformance of Labor Force Supply and Demand and Options of Preclusion thereof Conformance of the Labor Force Supply to the Demand in Short-Term Conformance of the Anticipated Labor Force Supply to the Demand in Long-Term Policy Alternatives Selected Alternatives Evaluation Methods of Alternatives Evaluation of Alternatives Gratitude References Annexes v

6 Table Index Table 1. Modeling Methodology...18 Table 2. Applicable Technological Environments...19 Table 3. Model dimensions used in MS Excel environment...41 Table 4. Dimensions used in DOM...46 Table 5. Indicative scale of analysis...49 Table 6. Satisfaction level of labor force demand in profession groups (MS Excel forecasts)...49 Table 7. Satisfaction level of labor force demand in industries (DOM forecasts)...53 Table 8. Satisfaction level of labor force demand in profession groups (DOM forecasts)...54 Table 9. Options of channeling the labor force surplus...56 Table 10. Profession groups with significant deficiency of labor force...57 Table 11. Activities of enforcement of the newly introducible system...61 Table 12. Measures for implementing the IT solution for labor force forecasting...67 Table 13. Costs of system elaboration...70 Table 14. Sections of Statistical Information for Making Decisions...77 Table 15. Contents of the data array used in the research...82 Table 16. Applicable analytical and statistical forecasting methods...85 Table 17. Comparison of demographic and economic situation...87 Table 18. Short-term forecasts of labor force supply and demand...91 Table 19. Macroeconomic parameters forecasted by the Ministry of Finance Table 20. Assumptions of creation and maintenance costs of new places of employment Table 21. Financial calculations of research maintenance alternative Table 22. Financial calculations of the alternative of improvement of the existing system Table 23. Costs of formation and maintenance of new places of employment at the Research Institute Table 24. Cost assumptions of IT system improvement Table 25. Financial calculations of the alternative of creating an agency and implementation of IT solution Table 26. Comparison of cash flows of the alternatives Table 27. Calculations of global priorities vi

7 Figure Index Figure 1. Components of the Forecasting Methodology...17 Figure 2. Data array obtained during the research...27 Figure 3. Data array used during the research...28 Figure 4. Number of the employed in 37 profession groups and in one-year age groups...34 Figure 5. Number of the employed in industries and in one-year age groups...35 Figure 6. Data study, modeling, and forecasting in MS Excel environment...37 Figure 7. Structure of the MS Excel file APRtab_ISTbloks.xls...39 Figure 8. Schematic illustration of DOM structure...42 Figure 9. Description of the LR education system in the dynamic optimization model...43 Figure 10. Trends of possible labor force provision in agriculture and forestry...48 Figure 11. Scheme of DOM simulation results analysis...52 Figure 12. Total labor force supply and demand (DOM forecasts)...53 Figure 13. Structure of the Consultative Council...62 Figure 14. Mechanism of cooperation between the Research Institute and ministries...63 Figure 15. Mechanism of institutional cooperation in labor market forecasting...66 Figure 16. Logical architecture of the system...68 Figure 17. General scheme of the institutional solution...69 Figure 18. Data to be used in forecasting...84 Figure 19. Demand, supply of teachers...90 Figure 20. Mechanism of cooperation between institutions in case of Research Maintenance Alternative...97 Figure 21. Mechanism of cooperation between institutions in case of Alternative of Establishing an Agency and Implementation of IT Solution...99 Figure 22. Schematic illustration of levels of the hierarchy analysis methods Figure 23. Evaluation of research maintenance alternative Figure 24. Evaluation of the alternative of improving the existing system Figure 25. Evaluation of the alternative of agency creation and implementation of IT solution vii

8 List of Abbreviations AIP Higher Education Council ANL Analytical tables APR Calculation tables BLS Bureau of Labor Statistics COPS Canadian Occupational Projection System CPS Centre of Policy Studies CSP Central Bureau of Statistics DDA Employer survey conducted within framework of the research DfES Department for Education and Skills DŅA Employee survey conducted within framework of the research DOM dynamic optimization model EM Ministry of Economics of the Republic of Latvia FNPV financial net present value HRDC Human Resources Development Canada IAB Institute for Employment Research IfO Institute for Economic Research GDP gross domestic product IT information technologies IVD electronic table of input data block IZM Ministry of Education and Science of the Republic of Latvia KM Ministry of Culture of the Republic of Latvia LBAS Latvian Free Labor Union Association LDDK Latvian Employer Confederation LIAA Latvian Investment and Development Agency LM Ministry of Welfare of the Republic of Latvia LR Republic of Latvia LVL Latvian currency lats MK Cabinet of Ministers of the Republic of Latvia MRP Mediterranean Regional Project MS company Microsoft NVA Employment State Agency NGO non-governmental organization viii

9 OECD Organization for Economic Co-operation and Development PIC Professional Education Center PKIVA Professional Career Selection State Agency RAPLM Ministry of Regional Development and Municipal Affairs of LR ROA Research Centre for Education and the Labor Market SPSS Statistical Package for the Social Sciences VM Ministry of Health of LR VRAA State Regional Development Agency ix

10 Terminology Definitions Researches of the 1 st component are the researches within framework the project Researches of the Ministry of Welfare of the European Union structural fund national program Labor market researches : research on Detailed labor force and labor market research in economic sectors, research on Professional mobility of the labor force, research on Professional activities of professional and higher education institution graduates upon graduation, research on Adequacy of the professional and higher education programs to the labor market requirements, and Research of long-term forecasting system of labor market demand and the analysis of improvement opportunities. Analytical model is a formula displaying the real functional coherences in economics, according to which the results of the economic processes are dependent from the expenses. Analysis phase is the stage of the information system elaboration project, during which the requirements are elaborated in detail for the system, the system subdivision in sub-systems, applicable technical solutions, the volume of the introducible activities and the plan of the elaboration terms specified. Employer (owner) is a person performing business activities, professional practice, or managing a farm with a purpose to gain income or benefits and employs one or more individuals for a valuable consideration. Employee (hired worker, laborer) is an individual performing certain work (including work in a family far or family enterprise/private practice), from which the individual or its family gains income, profits (monetary payment, compensation with goods, or services). Labor market is the place and time where and when coordination of the labor supply and demand occurs. Balancing of the labor market is conformance of the labor force supply described by the quantitative and the qualitative aspect to the labor force demand. Labor force is the population of the country having capacity for labor. Labor force supply is the totality of the economically active inhabitants in the age of labor capacity from 15 to 74 years of age. Labor force demand is the number of the employed necessary in economics, which is established by the total number of the unfilled places of employment and the vacant positions. Definition phase is the stage of the information system elaboration project, within which high level requirements are gathered for the system, distribution in phases, and the activities to be performed and results achieved during each phase, the guidelines of system architecture. Expert evaluation method is a quantitative analysis method, which is used in formation of the mathematical model entry information, for verification and correction of the acquired results. Global priorities are the final values of calculations of the hierarchy analysis method, which are acquired based on expert evaluation, by comparing criteria groups, separate criteria, and alternatives and allow selecting the optimum solution. x

11 Hierarchy analysis method is an analysis method created by an American mathematician T. Saaty, which is based on arrangement of the system elements, by using decomposition or problem distribution in equal sections and synthesis or numeral evaluation of experts about the level of element interaction intensity in the hierarchy. Implementation phase is the stage of information system elaboration, where the users are trained to work with the system, the administrative procedures related to use of the system are mastered, as well as various imprecision are sought and eliminated. The result of the implementation phase is commencement of system exploitation for the relevant needs. Simulative modeling allows not only forecasting the system condition in the future, but also to analyze, how certain policy alterations will affect it. Information technology solution guarantee of technical devices and software, as well as informative and administrative provisions for performance of certain functions. Institutional system is an arranged administration in a uniform hierarchical system. The basic elements of institutional system of state administration are the state administration institutions established within the legal enactments, establishment and operation regulations thereof, and the procedures of decision preparation and making. Development phase is the project phase of information system development, wherein the technical projecting is formed and the system itself is developed (programmed), and the result of this phase is operating software. Modeling is an indirect research method of objects-originals, by researching the object-substitute. A model is the basic principle of the modeling theory. According to the definition of the modeling theory, the model is the object-substitute, which can be an artificial or actual auxiliary system, which is in an objective conformance with the object-original, and as a result of the research the necessary information about it is acquired. Model adequacy is its objective conformance to the modeling object. The model adequacy is to a certain extent a conditional conception, because complete conformance of the model to the actual object is not possible. Therefore the mathematical model adequacy in the modeling process means objective conformance only to such qualities of the actual object, which in the given research are quintessential. Model body is a complex of various types of models, where there are direct and reverse links between the models, as well as a complex approach at the base of its composition. Optimization is the development process of optimal solutions, i.e., selection of the optimum variant from the body of alternative variants. In economics and practical entrepreneurship, this term indicates such improvement and development of the existing activities, which requires significant structural alterations in it for achieving he desired goal. This term may not be used without established limitations and without precisely established optimality criterion. Optimization model is the central mathematical model type in the modeling theory, the parameters of which are assessed by applying the optimization methods. The optimization models provide with an option to perform analytical calculations according to the alternative variants of economic development, to compare them, to evaluate the benefits and consequences, to formulate the necessary implementation conditions, by selecting the best variant and quantitative justification thereof. These models are useful for analysis of structural modifications and in forecasting of development in economic processes. xi

12 Research institute is an agency formed on the base of the Latvian Statistical Institute, which will further analyze the labor market and elaborate the development scenarios and forecasts of the labor market. Profession or position is the professions of employees of the economy in compliance with the profession classifier of the LR. Forecasting methodology is the technological, informative, and administrative provision of the elaborated forecasting system. Administrative provision of the forecasting system is defining the IT solution requirements and implementation of long-term labor force market forecasting system by using various models and criteria of the IT solution selection. Informative provision of the forecasting system is the body of analytical methods of information gathering, arrangement, and processing, wherein various information types, sources, and flows are utilized. Technological provision of the forecasting system is the body of forecasting models, which allows performance of analytical calculation in various mutually interrelated technological environments. System dynamics is a computerized simulation modeling methodology, which is based on application of systemic thinking principles for analysis of complex system structure and behavior. xii

13 Introduction The research Research of long-term forecasting system of labor market demand and analysis of improvement opportunities is included in the National Program of the European Union structural funds Labor Market Researches in the set of the project Researches of the Ministry of Welfare. The research was performed in compliance with the priority of the Uniform Program-Document Development of human resources and promotion of employment. The general goal of it is to promote creation of employment and social policy programs based on the research results, for program region balance and durable improvement of development, to create justified and effective analytical base of decision making, thus promoting increase of employment, creation of inclusive labor market, and general development of Latvian economy. Implementation of the research occurred during the time frame from October 10, 2005 until May 31, Currently, in Latvia there is no uniform and coordinated medium-term or long-term labor force demand and supply forecasting system, on which the labor market development policy could be based. Due to lack of such uniform and coordinated system, the reaction time of the relevant state ministries and services to the changes in economic structure is too extensive. The deficiencies and slow policy reaction timing to labor market forecasts, which could be used in labor market decision making, indirectly affects also the following indices in the country: Structural unemployment level; Large number of the employed in spheres not corresponding to the education; Lack of labor force in specific industries and profession groups; Employment predominantly in low added value spheres/professions; Career selection of the existing and potential employees not corresponding to the economic structure. The topicality of implementing the long-term labor market forecasting system is increasing every year, because it is anticipated that due to the demographical situation during the following decades the number of inhabitants in the country will significantly decrease. That, however, will create new circumstances that are to be considered in education planning, as well as in analyzing the development perspectives of the economic industries. The direct goal of the research, which derives from the established problem, is to ensure adequate statistical information for determining the labor market supply and demand, as well as to create and develop analytical and forecasting methods for ensuring the conformance of the labor force during this and upcoming periods. Prior to the National Program Labor Market Researches, several other researches had been performed on forecasting of supply and demand in certain labor market aspects or sectors of Latvia. This research had a broader approach, which analyzed opportunities of implementation of uniform forecasting system in the Latvian labor force development policy. Within framework of the research, for forecasting the Latvian labor market trends the necessary data was acquired, processed, and systematized from the Central Bureau of Statistics (CSP), 1

14 Employment State Agency (NVA), Ministry of Education and Science (IZM), Employer and Employee Surveys, and other sources. The most significant results are as follows: Forecasting methodology has been developed, which includes the technological, informative, and administrative provision. The technological provision is based on the complex of the elaborated models, wherein included is the original dynamic optimization model, as well as the statistical and econometric models. The informative provision is based on the elaborated methodology of information gathering, arrangement, and processing, wherein included are various types of information, sources thereof, and flows. The administrative provision is based on defining the requirements of the elaborated information technology (IT) solution and on the elaborated implementation methodology of labor market forecasting system; Statistical forecasting models adequate for the Latvian situation in Microsoft (MS) Excel environment and the innovative dynamic optimization model with simulation options in Powersim Studio environment have been elaborated; Examination of adequacy of the elaborated models has been performed, they have been approbated with real statistical data, and the acquired forecast results have been economically interpreted; Guidelines were prepared for work with the labor market demand long-term forecasting models to extent of 118 pages (User s reference book for work with the improved Swedish labor market agency forecasting model in MS Excel environment and with the dynamic optimization model in Powersim Studio environment); The IT solution requirements were elaborated for practical implementation of the forecasting models into the state administration; Policy alternative analysis has been performed and the optimum implementation plan of the labor market supply and demand forecasting system has been determined. Review of the related literature, research methodology, acquired research results, conclusions, and provisions have been included in the research, as well as the alternatives have been analyzed in order to establish the optimum route for implementation of the forecasting system into the state policy. In the annexes to the research, the list of the interviewed individuals is included, along with the data tables, and a CD, which includes the data arrays acquired and used during the research, the modeling results in MS Excel environment and in Powersim Studio environment, user s reference book for work with labor market long-term forecasting models. The CD is available at the Labor Department of the Ministry of Welfare (LM). 2

15 1. General Conclusions and Proposals The research allows making conclusions on situation in the Latvian labor market, as well as about the necessary measures and tasks for implementation of a new labor force supply and demand forecasting system. The conclusions and proposals have been elaborated based on the acquired statistics, performed analysis, and modeling results: (1) By implementing the labor force supply and demand forecasting system, valuable statistical information will be acquired on the existing situation, as well as about the future development trends and the effects thereof on the balance of labor force supply and demand. When planning the labor force demand structure in the future, the state administration institutions will be able to perform forecasting calculations more precisely, objectively, and operatively for ensuring adequate labor force supply and demand. By implementing the labor force supply and demand forecasting system, a widely applicable tool will be created for justified and coordinated elaboration of state decisions to be made further on. (2) The most significant causes of non-conformance of the labor force supply and demand are related to several factors. The results of the research are indicative of the fact that already beginning with year 2008, the total labor force demand in Latvia will begin to significantly exceed the total supply of the labor force. In addition, during the whole forecast period until year 2030, this situation will intensify by every year, which is related to the demographical situation in the country. The non-conformance in the labor market is promoted also by rapid changes in the economic structure, the technological progress, labor force migration, and the delay time in adaptation of the education system. (3) In order to preclude non-conformance of the labor force supply and demand on the macro-economic level, there are several alternatives available: Performance of significant changes in the productivity level, by implementing the most recent technologies and by increasing the load of the labor force and the equipment; Introduction of labor force of the necessary qualification in Latvia from other countries, thus quantitatively increasing the extent of the labor force; Promotion of a more active participation of the Latvian inhabitants in the economic life of the country (employment of students, young mothers, senior citizens, and individuals with special needs), thus increasing the percentage of the economically active inhabitants. (4) In order to preclude the main cause of non-conformance of labor force supply and demand on macro-economic level non-conformance of labor force qualification to the market requirements one of the core solutions is adaptation of the education system to the current situation, by ensuring appropriate work for new-comers to the labor market. Firstly, by balancing the structure of the education system (number of student spots in professional programs) in such way that it would support the long-term economic demand. Secondly, the commenced work must be continued in development of life-long learning, which includes both improvement of professional skills of the employer, and training for the unemployed, as well as re-qualification from one profession group to another. Thirdly, in order to achieve faster balancing of labor force supply and demand, it is necessary to decrease the labor market reactions on alterations in economic structure for the total delay period, including by informing the society (employers and potential employees) about the trends existing in the labor market, in order for the participants of the labor market to be able to react more operatively to the occurring changes. 3

16 (5) The acquired forecast results are indicative of the fact that in short-term, excluding several industries, the situation of the labor market is close to balance, besides both the demand and the supply have a tendency to increase, although not at a steady manner. Thus, without making changes in the previous policy in many spheres, the disbalance in medium-term in labor market will become more distinct. For improvement of the situation, it is recommended to review the distribution of state paid spots both in professional-secondary and in higher education level institutions, as well as allocate additional means for arranging re-qualification and improvement of the professional skills of the unemployed and of the employed. (6) It is impossible to completely balance out the labor force supply according to the changes in demand within 20 years only with ensuring conformance of the education system to the labor market, because not only qualitative, but also quantitative disproportion between the labor force supply and demand is expected during the period to be analyzed. If significant improvements will not be introduced on the level of productivity, which could quantitatively decrease the demand for labor force resources, Latvia in future will face the necessity to attract the labor force from other countries. (7) When analyzing the quantitative disproportions in the labor force market, it must be emphasized that an undesired situation could be observed having the total demand of the economic labor force not being fully satisfied, whilst at the same time, in several profession groups a labor force surplus could be observed. A tendency has been observed that a majority of professions, in which during long-term labor force surplus is maintained, are social and humanitarian professions ( Specialists of humanitarian sciences, representatives of creative professions, Other specialists of social sciences, Legal professions (judges, attorneys, etc.), Employees working in art, culture, entertainment, and others). Surplus of the labor force could also be observed in such profession groups as Agriculturists, other senior specialists of agricultural professions and Individual services. Such results are indicative of the features of structural unemployment, the origination of which can be affected by separate changes of growth trends, development of technological progress, as a result of which the demand of labor force decreases in specific profession groups. The representatives of the above mentioned professions must be ensured with options of re-qualification, continuing education, and life-long learning, in order for it to be possible to change the qualification from the undemanded profession group to the demanded related profession group. (8) Deficiency of labor force could be observed in the professions of hard sciences, industrial and construction specialist professions, medicine professions, teacher and defense specialist professions. Considering the fact that in these professions currently the re-qualification options are limited, the state must implement measures to promote these professions amongst youth, by stimulating their choice through increasing the number of state paid study spots, through allocating special scholarships, etc. In order to promote a more balanced development of labor market, a well-considered policy must be implemented in respect to distribution of the study places, considering the foreseeable labor market development trends. In general, it must be concluded that the demand is increasing for specialists of medium and lower level qualifications, therefore it is necessary to promote the choice of the youth in favor of acquiring the professionalsecondary education, not confining to obtaining only the general education. In the professions, which require highest level of education, timely national planning must be implemented in respect to the supportable education spheres, because it is these profession groups that the balancing of the labor force supply and demand occurs with a greater delay. 4

17 (9) By analyzing the provision of the economic spheres with the human resources, it must be concluded that the most critical situation is forming in those spheres, where qualified labor force in hard sciences is required: C Extractive industry and quarry elaboration, D Manufacturing industry, E Electric energy, gas and water supply, F Construction, and I Transportation, storage, and communications. In these spheres, significant deficiency of labor force could be observed in the mediumterm and long-term forecasts, however in two spheres D and F the deficiency is in the whole forecasting period, including short-term. The spheres H Hotels and restaurants and J Financial intermediation in long-term forecasts is relatively the best supplied with labor force. It must be noted that in these spheres the representatives of social and humanitarian professions are employed, and in long-term in these professions surplus could be observed. (10) In the analysis of policy alternatives, evaluation and versatile comparative analysis have been performed to the three of the selected alternatives Research maintenance alternative, Alternative of improving the existing system, and Alternative of establishing an agency and implementation of IT solution. Considering the fact that the implementation of the forecasting system is not related to direct financial gains, then the financial net present value (FNPV) is negative. In respect to this aspect, the most optimum alternative would be Research maintenance alternative, because the costs thereof are significantly lower than the costs of implementation of the other alternatives: FNPV in case of this alternative is Latvian lats (LVL), in case of improvement of the existing system alternative, the indicator reaches already LVL, however the alternative of establishing an agency and implementation of IT solution is the least beneficial in financial respect LVL. (11) The selection of the optimum alternative according to the cost principle is possible only in case of completely equal gains, however the analysis of these alternatives according to the hierarchy analysis method is indicative to significant differences when assessing the usefulness of the alternatives. When assessing the three alternatives according to the criteria, which are summarized in criterion groups Costs, Institutional interests, State interests, Effect on the policy implementation results, and System functionality, the alternative of establishing an agency and implementing the IT solution was recognized to be significantly superior over the others its global priority being 0.6 out of 1, which is a significant predominance in comparison with evaluations of the other alternatives. The socio-economic analysis of the alternatives confirm that the social effect of all alternatives to the participant groups the state institutions, non-governmental organizations (NGO), and the society will be positive, however the grandest effects is expected from implementing the Alternative of agency establishing and implementation of IT solution. (12) As a result of the comparative analysis it was concluded that in general the most optimal policy alternative must be selected the Alternative of establishing an agency and implementation of the IT solution. In order to implement the selected alternative in the state policy, the following key measures must be taken: Based on the IT solution elaborated during the research to implement new forecasting models in state institutions. The Ministry of Economy (EM) must undertake additional functions, which are related to the coordination of the medium and long-term labor market forecasting system. For implementation of these functions, EM must establish a new department. 5

18 Create a new research institution under subordination of EM on the base of the existing Latvian Statistical Institute, which would perform coordination and improvement of the general forecasting system, as well as maintenance of the new models, and forecasting. The newly established Research Institute to arrange data gathering and processing, as well as use the IT system elaborated during the research for further implementation of forecasts and to perform regular forecast updates. In order to ensure the inter-institutional cooperation, system implementation, and successful operations, to create a Consultative Council for the matters of labor market analysis and forecasting. The Consultative Council would be created according to the initiative of EM as the institution coordinating the labor market forecasting process in the country. It should definitely include the institutions involved in creation, analysis, and forecasting of the labor market policy (LM, IZM, EM, Ministry of Regional Development and Municipal Affairs (RAPLM), Ministry of Agriculture (ZM), Ministry of Culture (KM), and Ministry of Health (VM). The staff of the Consultative Council should also include representatives from the Latvian Employer Confederation (LDDK) and the Latvian Free Labor Union Association (LBAS). 6

19 2. Literature Review 2.1. Review on Legislation and Policy Documentation One of the most significant policy planning documentations of the European Union is the Lisbon Strategy, wherein defined is the strategic goal of the European Union until year 2010, to make Europe the most competitive and dynamic economy in the world based on knowledge, basing on sustainable development with better employment positions and higher social cohesion. In order to implement the goals of the Lisbon Strategy, the following was established: (1) to achieve employment to a 70% level; (2) to decrease the average unemployment level down to 4%; (3) to achieve the female employment to 60% level (European Commission 2000: 20). The Lisbon Strategy encompasses the following policy spheres: economy and finance; information society; employment and social cohesion; environmental development based on a wide economical reform packet, and a transfer to information economy and society. In order to create information economy, special attention is devoted to the following directions (1) information society; (2) science and innovations; (3) capital of human resources and education. In implementation of the employment goals of the Lisbon Strategy, the European Employment Strategy has the leading role. The EU Employment Strategy is focused on contribution of the employment policy in creation of new and better employment positions. The implementation thereof must promote the rising of the employment level, increase of employment productiveness, and social unity. The employment strategy establishes general employment goals and priorities for operations of EU and member states. One of the basic approaches of the Employment Strategy sets forth to implement such employment policy that has a goal of achieving complete employment, improvement of labor quality, and increase of the labor productivity, as well as strengthening social and territorial cohesion (European Union Council 2005: 3). The long-term forecasting system of the labor market supply and demand elaborated within framework of the research directly promotes achievement of the above-mentioned goal. For achieving the Lisbon Strategy, the Commission offers concentrating on two basic tasks: (1) to achieve a more rapid and sustainable growth; (2) to create more and better employment positions. The employment policy of Latvia is geared towards the main challenges in the employment sphere. As the most important of Latvian employment policy problems the following are identified: low mobility of the labor force and adaptation ability thereof to the new market requirements, necessity to fortify the labor market institutions in order to ensure flexible labor market development. In elaboration of the employment policy, the relatively high level of unemployment and especially the lasting unemployment problem and structural unemployment is taken into consideration. Latvia has prepared the Latvian National Lisbon Program for , which is a policy planning document, which is indicative of what Latvia will be executing for reaching medium-term period goals national growth and employment promotion, and how it will implement the Integrated Basic Approaches adopted by the Council on July of For achieving the goal, the annual GDP increase of 6-8% must be ensured and the employment level must be increased to 65%, including female employment to 61% and older individuals 7

20 to 48%. In the Latvian National Lisbon Strategy it is concluded that The market economy, by setting forth new requirements for professional qualification, is developing faster than the supply of corresponding professional and higher education programs. Therefore in several professions nonconformance is building between the labor market demand and the existing educational demand. The distribution of the students in study thematic groups does not conform to the economic needs and changes in labor market. The cooperation between the educational institutions and the employers is not sufficient enough. (The Cabinet of Ministers 2005: 7). On February 6, 2003, a mutual declaration was signed between the Latvian government and the European Commission on Latvian employment policy priorities (Joint Assessment Paper), wherein the readiness of Latvia to adapt the guidelines of the European Union employment policies is evaluated (improvement of labor capacity, entrepreneurial development, promotion of adaptation abilities of companies and their employees, ensuring policy of equal opportunities) and the further development directions of the Latvian employment policy were set forth. The joint declaration on priorities of Latvian employment policies is geared towards the key challenges in the employment sphere: the labor market must display the dynamic market economy requirements in the single market circumstances, especially depending on whether the labor force is mobile, able to adapt, and professional; the necessity to create a corresponding policy and institutions, in order to ensure development of a flexible labor market. Several priority policy spheres are put forward in the joint declaration, wherein progress must be achieved in the Latvian market and where further monitoring must be implemented. As one of the most significant disadvantages in the system of continuing professional education the following is mentioned: As long as there are indications specifying that provision of state paid continuing professional education does not conform to the current needs, it is difficult to establish the place for further professional education at a situation of lacking a comprehensive database in respect to education provision level, its financing, and distribution of continuing professional education between industrial training and other programs. Preparation of such database in a capacity of an important contribution in the development of future policy is to be established as one of the priorities. (Ministry of Welfare, European Commission 2003: 23) On October 6, 2006, the European Union Council has issued a decree on Community Strategic Guidelines on Cohesion Strategy. Within framework of the strategic guideline to create more and better employment positions it is established that in relation to the development of human capital, the following action priority is emphasized in the strategic employment guidelines: to improve the adaptation ability of employees and companies and to improve flexibility of the labor market (Council of the European Union 2006:13). Thus the analysis of the labor market supply and demand in long-term and medium-term forecasting system performed within framework of this research provides a contribution to achievement of this goal. On October 31, 2006, the Cabinet of Ministers (MK) approved the statutes of the Ministry of Economy (EM), providing that beginning with July 1, 2007, the Ministry will be responsible for coordinating the labor market medium-term and long-term forecasting process in the country. For implementation of this function, the Ministry will establish a new department and a new special state agency with EM must be established for the forecasting of medium-term and long-term labor market trends. In order to ensure preparation of medium-term and long-term labor market forecasts, it is planned that the agency (Research Institute) will be formed on the base of the Latvian 8

21 Statistical Institute, which will from there on analyze the labor market, development scenarios and forecasts of the labor market development. Within framework of this research, the implementation alternatives of the long-term forecasting systems of the labor market supply and demand are coordinated with the above-mentioned MK decree and will provide assistance in implementation of this decree (MK, 2006) Review on Data and Previously Performed Researches When commencing the work on elaboration of the long-term forecasting system, a research of previously performed researches in this sphere was performed and the criteria for research analysis were established. For exploration of the researches, mainly the electronic database was utilized. The attention of the researchers was concentrated on those researches that display the situation in the labor market in Latvia and abroad. Particular attention was devoted to a detailed research of the Swedish Labor Market Agency model. The sequence of the works performed: The data or conclusions, which could be obtained from the previously performed researches in Latvia, that are useful for the forecasting system were explored and analyzed. More than 15 researches of Latvian labor market were examined and analyzed; The data or conclusions, which could be obtained from the previous researches performed abroad, that are useful for the forecasting system were explored and analyzed. Mostly analyzed were labor force supply and demand forecasting models, which have been implemented abroad (please, see Chapter 2.3 for more information); The utilization opportunities of the Swedish labor market agency model were analyzed; Information that is necessary for elaboration of forecasting models was gathered. After obtaining the researches, the researchers analyzed the utilization opportunities of the existing researches according to the goal of the given research. The aspects that are necessary in integration into the forecasting system were established: the effects of legislation on employment are displayed in the research; the effect of the amount of salary on employment; macroeconomic regularities; econometric models used in the research; conceptual model; flow diagram models; dynamic rows; implementation of models displayed in the research; necessary data model; credibility of the available data evaluated. The most significant researches according to the long-term labor market forecasting are those, wherein the information displayed is based on scientific approach in the analysis of the research object. In these researches, the econometric models are applied, the variables used are scientifically proven, and the dynamic rows have been used. Attention was devoted also to those researches, where the displayed information is based only on conceptual models. Several works related to use of dynamic models in labor market forecasting abroad were also examined. The modeling environments are various: Vensim, Powersim, Dynasys, Heraklit, and other. It must be added that in most cases of dynamic model creating, Vensim and Powersim modeling environments are used. Also the goals were examined, which are set 9

22 forth when creating a dynamic micro-imitation model, as well as application opportunities and conditions of such models. To a large extent and in great detailed analyzed were the most common dynamic micro-imitation models of the world and illustration of the labor market problems in these models. Within framework of the research, these previously elaborated models and performed researches had the greatest practical importance the Swedish labor market agency model, the research on Modeling of the Latvian economy with a special emphases on the labor market, the continuous labor force survey performed by CSP, Profession survey, Wage structure survey, NVA survey. The Model of the Swedish Labor Market Agency The forecasting methodology of the Swedish labor market was initiated in year 1960 and it has been modified multiple times (the work materials of the specialists of the Swedish Labor Market Agency). The current labor market forecasting model was implemented beginning with year The labor market forecasting model was elaborated for use in several institutions: Public Employment Offices, County Labor Boards, and National Labor Market Board. The content and meaning of the forecasting has also changed over the course of time. Initially, the forecasting was not quantitative the anticipated modifications were described in words, for instance, the employment will increase/decrease etc. The labor force supply and employment was very shortly described. The forecasting methodology was not identical in all regions. Only beginning in year 1990, a uniform labor market forecasting methodology was implemented. The forecasting data are both on national and on regional level. The following spheres are selected in Sweden: agriculture and forestry, manufacturing, construction, services, retail and public catering, communication and education, social care and health protection. There is a well-arranged register of companies in Sweden, where sufficient information is available about the employment positions of the companies. It is used for planning the company surveys. The Swedish statistics is accountable for the inhabitant forecast in the country and regions thereof, also considering migration. The regional labor force councils must forecast the inhabitants of the region that are labor capable, considering the education level. The economic situation in the country and its regions is analyzed and forecasted with the goal to specify the forecast of the necessity for the labor force. The economic forecast is the most difficult one of all forecasts. For economic forecasts, macroeconomic indicator linear trends and macroeconomic models are used. The Swedish labor market agency model consists of three blocks: Model of retirements, Short-term labor market forecasting model, and Long-term labor market forecasting model. The model of retirement provides with input data for the other two labor market forecasting models. The labor market forecasting short-term model is formed to obtain data for the labor market analysis and for short-term (1-2 years) planning. The results of this model can be used planning individual short-term education programs. The long-term model of the labor market forecasting has been formed to obtain data for the labor market analysis and for long-term (10-15 years) forecast. The results of this model can be used for planning long-term education systems and individual study programs. 10