Economic modelling of skills demand and supply. Australian Workforce and Productivity Agency

Economic modelling of skills demand and supply Australian Workforce and Productivity Agency 2 November 2012

Contents Glossary... i Executive Summary... i 1 Introduction... 13 2 Macroeconomic view... 15 2.1 National economic view... 15 2.2 Industry view... 37 2.3 State economic view... 39 3 Labour market projections... 41 3.1 Employment growth by occupation... 41 3.2 Replacement demand... 43 3.3 Projected job openings... 44 4 Drivers of skills demand... 48 4.1 Current qualification profile... 48 4.2 Multiple qualification holding... 49 4.3 Skills deepening over time... 52 4.4 Skills broadening... 55 5 Implied demand for qualifications... 56 5.1 Projected employment by highest level qualification... 56 5.2 Projected total qualifications held... 61 5.3 Projected additional qualifications required... 65 6 Drivers of skills supply... 73 6.1 Student qualification completion profile... 73 6.2 Net overseas migration profile... 77 6.3 Demographic projections... 83 6.4 Trends in year 12 completion... 86 6.5 State of the labour market... 87 6.6 Capacity issues... 88 7 Projected supply of qualifications... 89 7.1 Projected student completions... 89 7.2 Projected contribution from net migration... 92 7.3 Total projected supply of qualifications... 96 8 Balance of supply and demand... 99 8.1 Supply less demand (based on employment)... 99 8.2 Supply less demand (based on labour force)... 105 9 Conclusions and further work... 107 Liability limited by a scheme approved under Professional Standards Legislation. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. 2011 Pty Ltd

9.1 Report conclusions... 107 9.2 Further work... 108 References... 109 Appendix A : Methodology for qualification demand projections... 111 Appendix B : Retirement rate estimates a worked example... 118 Appendix C : Methodology for qualification supply projections... 125 Appendix D : Benchmark labour force participation rates... 139 Appendix E : Detailed labour market projections... 141 Appendix F : Implied supply and demand projections by State... 166 Limitation of our work... 174 Charts Chart i : Employment growth (%)... ii Chart ii : Projected growth in youth cohort (15-24)... viii Chart 2.1 : Terms of trade index... 17 Chart 2.2 : Net overseas migration levels ( 000)... 18 Chart 2.3 : Level of overseas arrivals ( 000)... 18 Chart 2.4 : Level of overseas departures ( 000)... 19 Chart 2.5 : Population growth (%)... 22 Chart 2.6 : Population level (millions)... 22 Chart 2.7 : Age based labour force participation rates, 2020... 24 Chart 2.8 : Labour force participation rate... 25 Chart 2.9 : Unemployment rate... 25 Chart 2.10 : Employment growth (%)... 26 Chart 2.11 : Labour productivity growth (%)... 27 Chart 2.12 : Output growth (%)... 28 Chart 2.13 : Output growth per capita (%)... 28 Chart 2.14 : Exports as a share of GDP (%)... 29 Chart 2.15 : Business investment as a share of GDP (%)... 30 Chart 2.16 : Business investment level ($m per quarter, real)... 30 Chart 2.17 : CPI growth (%)... 31 Chart 2.18 : TWI exchange rate (nominal)... 32 Chart 2.19 : $US/$A exchange rate (nominal)... 32 Chart 2.20 : TWI exchange rate (real)... 33 Chart 2.21 : Gross savings as a share of GDP (%)... 34

Chart 2.22 : Current account deficit (% of GDP)... 35 Chart 2.23 : 10 year bond rates... 36 Chart 2.24 : Mortgage interest rates... 36 Chart 6.1 : Number of domestic student completions by qualification... 74 Chart 6.2 : Qualification completion profile by age, 2010... 75 Chart 6.3 : DIISRTE projections of domestic Bachelor degree completions... 76 Chart 6.4 : Projected qualification completion profile, Long boom... 77 Chart 6.5 : Net overseas migration levels ( 000)... 78 Chart 6.6 : Long term resident departures... 79 Chart 6.7 : Share of new migrants holding a post-school qualification... 80 Chart 6.8 : Propensity to hold a post-school qualification by component of net migration... 82 Chart 6.9 : Post-school qualification profile, components of net international migration, 2010... 83 Chart 6.10 : Projected growth in working age population (15-64)... 84 Chart 6.11 : Projected growth in youth cohort (15-24)... 85 Chart 6.12 : Projected aged dependency ratio... 85 Chart 6.13 : Year 12 completion rates by scenario... 86 Chart 6.14 : Unemployment rate... 87 Chart 6.15 : Growth in real wages (measured by productivity)... 88 Chart 7.1 : Projected student qualification completions by scenario, 2025... 92 Chart 7.2 : Projected qualifications from net migration by scenario, 2025... 94 Chart 7.3 : Total projected supply of qualifications by scenario, 2025... 98 Chart C.1 : Projected completion profiles by scenario... 127 Chart C.2 : Domestic undergraduate commencements, Australia... 129 Chart C.3 : DIISRTE projections of domestic Bachelor degree completions... 130 Chart C.4 : Impact of adjustments on forecasts of undergraduate completions, long boom... 131 Chart C.5 : Growth in domestic postgraduate commencements (lagged) and completions... 131 Chart C.6 : Ratio of domestic postgraduate commencements (lagged) to completions... 132 Chart C.7 : Impact of adjustments on forecasts of postgraduate completions, long boom... 133 Chart C.8 : Share of new permanent migrants holding a post-school qualification... 136 Chart C.9 : Propensity to hold a post-school qualification by component of net migration... 137 Chart D.1 : Labour force participation rates based on holding of post-school qualifications... 140 Chart D.2 : Comparison of aggregate labour force participation scenarios (2025)... 140

Tables Table i : Projected industry employment growth by scenario... iii Table ii : Projected occupational employment growth by scenario... iv Table iii : Number of additional qualifications required by those employed, unemployed or not in the labour force... vi Table iv : Total projected supply of qualifications by scenario... ix Table v : Projected qualification supply less demand (based on labour force) by scenario and qualification type... x Table 2.1 : Summary assumptions by scenario... 16 Table 2.2 : Components of net overseas migration by scenario... 20 Table 2.3 : Age based labour force participation rates, 2025... 23 Table 2.4 : Projected industry output growth by scenario... 37 Table 2.5 : Projected industry employment growth by scenario... 38 Table 2.6 : Projected State output growth by scenario... 39 Table 2.7 : Projected State employment growth by scenario... 40 Table 3.1 : Projected occupational employment growth by scenario... 41 Table 3.2 : Projected occupational employment growth, Long boom... 42 Table 3.3 : Projected occupational employment growth, Smart recovery... 42 Table 3.4 : Projected occupational employment growth, Terms of trade shock... 43 Table 3.5 : Projected occupational employment growth, Ring of fire... 43 Table 3.6 : Projected retirement rates by scenario... 44 Table 3.7 : Gross turnover by occupation... 45 Table 3.8 : Projected job openings by occupation ( 000), Long boom... 46 Table 3.9 : Projected job openings by occupation ( 000), Smart recovery... 46 Table 3.10 : Projected job openings by occupation ( 000), Terms of trade shock... 46 Table 3.11 : Projected job openings by occupation ( 000), Ring of fire... 47 Table 4.1 : Share of employment by occupation with highest level qualification, 2011... 48 Table 4.2 : Total workforce - Number of qualifications held by highest post-school qualification (2009)... 49 Table 4.3 : Total workforce - Number of qualifications held by highest post-school qualification (2001)... 49 Table 4.4 : Managers - Number of qualifications held by highest post-school qualification... 50 Table 4.5 : Professionals - Number of qualifications held by highest post-school qualification. 50

Table 4.6 : Technicians and Trades Workers - Number of qualifications held by highest postschool qualification... 50 Table 4.7 : Community and Personal Service Workers - Number of qualifications held by highest post-school qualification... 51 Table 4.8 : Clerical and Administrative Workers - Number of qualifications held by highest postschool qualification... 51 Table 4.9 : Sales Workers - Number of qualifications held by highest post-school qualification 51 Table 4.10 : Machinery Operators And Drivers - Number of qualifications held by highest postschool qualification... 51 Table 4.11 : Labourers - Number of qualifications held by highest post-school qualification... 52 Table 4.12 : Share of employment by occupation with highest level qualification, 2025, Long boom 53 Table 4.13 : Share of employment by occupation with highest level qualification, 2025, Smart recovery... 53 Table 4.14 : Share of employment by occupation with highest level qualification, 2025, Terms of trade shock... 54 Table 4.15 : Share of employment by occupation with highest level qualification, 2025, Ring of fire 54 Table 4.16 : Share of total qualifications held that were undertaken at higher level (skills deepening)... 55 Table 4.17 : Share of total qualifications held that were undertaken at same or lower level (skills broadening)... 55 Table 5.1 : Estimated occupational employment by highest level qualification, 2011 ( 000)... 57 Table 5.2 : Estimated occupational employment by highest level qualification, Long boom, 2025 ( 000)... 57 Table 5.3 : Estimated occupational employment by highest level qualification, Smart recovery, 2025 ( 000)... 58 Table 5.4 : Estimated occupational employment by highest level qualification, Terms of trade shock, 2025 ( 000)... 58 Table 5.5 : Estimated occupational employment by highest level qualification, Ring of fire, 2025 ( 000) 59 Table 5.6 : Persons employed by highest level qualification, Long boom ( 000)... 60 Table 5.7 : Persons employed by highest level qualification, Smart recovery ( 000)... 60 Table 5.8 : Persons employed by highest level qualification, Terms of trade shock ( 000)... 61 Table 5.9 : Persons employed by highest level qualification, Ring of fire ( 000)... 61 Table 5.10 : Total qualifications held by those employed, Long boom ( 000)... 62 Table 5.11 : Total qualifications held by those employed, Smart recovery ( 000)... 62 Table 5.12 : Total qualifications held by those employed, Terms of trade shock ( 000)... 63 Table 5.13 : Total qualifications held by those employed, Ring of fire ( 000)... 63

Table 5.14 : : Qualifications held by those unemployed or not in the labour force, Long boom ( 000) 64 Table 5.15 : Qualifications held by those unemployed or not in the labour force, Smart recovery ( 000)... 64 Table 5.16 : Qualifications held by those unemployed or not in the labour force, Terms of trade shock ( 000)... 64 Table 5.17 : Qualifications held by those unemployed or not in the labour force, Ring of fire ( 000) 65 Table 5.18 : Number of additional qualifications required by those employed, Long boom ( 000)66 Table 5.19 : Number of additional qualifications required by those employed, Smart recovery ( 000) 67 Table 5.20 : Number of additional qualifications required by those employed, Terms of trade shock ( 000)... 68 Table 5.21 : Number of additional qualifications required by those employed, Ring of fire ( 000)69 Table 5.22 : Additional qualifications required by those employed by scenario and broad occupation... 70 Table 5.23 : : Number of additional qualifications required by those unemployed or not in the labour force, Long boom... 71 Table 5.24 : Number of additional qualifications required by those unemployed or not in the labour force, Smart recovery... 71 Table 5.25 : Number of additional qualifications required by those unemployed or not in the labour force, Terms of trade shock... 71 Table 5.26 : Number of additional qualifications required by those unemployed or not in the labour force, Ring of fire... 72 Table 5.27 : Number of additional qualifications required by those employed, unemployed or not in the labour force... 72 Table 6.1 : Domestic student completions by qualification... 74 Table 6.2 : Components of net overseas migration... 78 Table 6.3 : Occupational profile of net overseas migration components, 2006-2010... 80 Table 7.1 : Projected student qualification completions by scenario... 89 Table 7.2 : Growth in projected student qualification completions by scenario... 90 Table 7.3 : Projected student qualification completions by scenario and broad occupation... 91 Table 7.4 : Projected qualifications from net migration by scenario... 93 Table 7.5 : Projected qualifications from net migration by scenario and broad occupation... 95 Table 7.6 : Total projected supply of qualifications by scenario... 96 Table 7.7 : Total projected supply of qualifications by scenario and broad occupation... 97 Table 8.1 : Projected qualification supply less demand (based on employment) by scenario... 99

Table 8.2 : : Projected qualification supply less demand (based on employment) by scenario and occupation... 101 Table 8.3 : Projected qualification supply less demand (based on employment) by scenario and qualification type... 102 Table 8.4 : Projected qualification supply less demand (based on employment) by scenario and qualification type number of people... 103 Table 8.5 : Projected qualification supply less demand (based on labour force) by scenario and qualification type... 105 Table 8.6 : Projected qualification supply less demand (based on labour force) by scenario and qualification type number of people... 106 Table B.1 : Census employment - Nursing Professionals... 119 Table B.2 : Entry and exit by age - Nursing Professionals... 120 Table B.3 : Employment levels by age Nursing Professionals... 121 Table B.4 : Retirement rate for Nursing Professionals, 2011... 123 Table C.2 : Migrant qualification profile, share of migrants with a qualification... 138 Table D.1 : OECD 80 th percentile participation rates by age (2009)... 139 Table E.1 : Projected industry employment growth by scenario (3 digit ANZSIC)... 141 Table E.2 : Projected occupational employment growth by scenario (4 digit ANZSCO)... 148 Table E.3 : Projected retirement rates by scenario (4 digit ANZSCO)... 157 Table F.1 : Projected qualification supply less demand (based on labour force) by scenario and qualification type, New South Wales... 166 Table F.2 : Projected qualification supply less demand (based on labour force) by scenario and qualification type, Victoria... 167 Table F.3 : Projected qualification supply less demand (based on labour force) by scenario and qualification type, Queensland... 168 Table F.4 : Projected qualification supply less demand (based on labour force) by scenario and qualification type, South Australia... 169 Table F.5 : Projected qualification supply less demand (based on labour force) by scenario and qualification type, Western Australia... 170 Table F.6 : Projected qualification supply less demand (based on labour force) by scenario and qualification type, Tasmania... 171 Table F.7 : Projected qualification supply less demand (based on labour force) by scenario and qualification type, Northern Territory... 172 Table F.8 : Projected qualification supply less demand (based on labour force) by scenario and qualification type, ACT... 173

Glossary ABS ACARA ANZSCO ANZSIC ASCO AWPA COAG DAE DAEM DEEWR DIAC FPA GDP IGR LSIA MYEFO NCVER OECD SEW TOT VET Australian Bureau of Statistics Australian Curriculum, Assessment and Reporting Authority Australian and New Zealand Standard Classification of Occupations Australian and New Zealand Standard Industry Classification Australian Standard Classification of Occupations Australian Workforce and Productivity Agency Council of Australian Governments Macroeconomic model Department of Education, Employment and Workplace Relations Department of Immigration and Citizenship Forecast period average Gross Domestic Product Intergenerational Report (Federal Treasury) Longitudinal Survey of Immigrants to Australia Mid-Year Economic and Fiscal Outlook National Centre for Vocational Education Research Organisation of Economic Co-operation and Development Survey of Education and Work Terms of Trade Vocational Education Training Liability limited by a scheme approved under Professional Standards Legislation. Deloitte refers to one or more of Deloitte Touche Tohmatsu Limited, a UK private company limited by guarantee, and its network of member firms, each of which is a legally separate and independent entity. Please see www.deloitte.com/au/about for a detailed description of the legal structure of Deloitte Touche Tohmatsu Limited and its member firms. 2011 Pty Ltd

Executive Summary The Australian Workplace and Productivity Agency (AWPA) commissioned Deloitte Access Economics to undertake economic modelling which draws out the skills implications of a range of scenarios. The modelling examines both the demand for post-school qualifications (demand by industry) and the supply of new post-school qualifications (completions by domestic students and those provided through net migration). The modelling is conducted at both the national level and for each State/Territory with the focus of results in this report at the national level. The scenarios Four main scenarios have been considered for this report as set out below. The scenarios were formulated by the AWPA with developing economic parameters for the scenarios (under the guidance of the AWPA). The long boom scenario is largely based on the steady growth view of the Australian economy, consistent with budget projections from Federal Treasury. The stimulus coming to the Australian economy from China s economic boom is diluted over time, though that occurs at a slow rate - the terms of trade declines moderately over time but remains at levels over the next 15 years which are still high in historic terms. Imbalances in the European economies and elsewhere do not have a major effect over Australia s growth rate. Australia s economic and employment growth continues in a steady fashion over the forecast horizon to 2025. A key feature of this scenario is a significant lift in age based labour force participation rates, beyond the levels which are projected by Federal Treasury to occur. This trend would be assisted by a higher rate of qualification attainment over time. This scenario also sees high levels of net overseas migration sustained over time. The smart recovery scenario is one where the current difficulties facing the Australian and global economies live on for several more years. Australia follows a low growth path to 2015, but after that date the global economy improves and Australia is able to move back towards its potential growth path. Indeed, the period of economic stagnation forms a trigger for greater take-up of technology and improvement in productivity. A key feature of this scenario is a significant lift in Australia s rate of labour productivity growth after 2015 as a key driver of growth. In the terms of trade shock scenario, the global economy continues to grow at a healthy rate over time. However, compared with the long boom, the benefits to Australia of this growth are reduced because there is a more substantial reduction in Australia s terms of trade. i

Australia s mining sector still enjoys a significant expansion in this scenario, but the returns on that expansion to the national economy are far less than if the terms of trade had remained high. The ring of fire scenario combines a lower global growth path over time with significant volatility. Business and consumer confidence in future economic performance is lowest in this scenario, where economic growth on average is more modest and a notable economic cycle occurs. Increased protectionism reduces trade between countries and stunts productivity growth. This scenario sees a notably lower path for the level of net overseas migration to Australia over time. The projected rate of employment growth over time across the scenarios is shown below in Chart i. In all scenarios there is a trend decline in the rate of employment growth over time, reflecting the demographic-driven expected slowing in working age population growth over time. Chart i: Employment growth (%) 5.0 Year-to growth in Employment 4.0 3.0 2.0 1.0 0.0-1.0 Jun 1995 Jun 2000 Jun 2005 Jun 2010 Jun 2015 Jun 2020 Jun 2025 Long Boom Smart Recovery ToT shock Ring of fire Source: ABS 6202.0, Composition of employment growth The demand for post-school qualifications across scenarios will depend not only on the overall rate of employment growth, but on the changing composition of the economy over time. In that regard, the expected industry composition of employment becomes very important and that then feeds into the likely occupational profile of the workforce over time. The expected industry and occupational profile of employment at the 1-digit ANZSIC and 1-digit ANZSCO levels are shown in the following tables. ii

Table i shows that those sectors which have been the big employment generators of recent years, such as business services, health care and other social services continue to generally see the strongest growth. Mining and transport employment do better in the long boom where the mining investment boom is the most sustained; smart recovery relatively favours IT and professional service roles as productivity growth is boosted; while manufacturing employment does relatively well in ring of fire as global trade wanes. Table i: Projected industry employment growth by scenario Average annual growth 2011-2025 Long boom Smart recovery ToT shock Ring of fire Agriculture 0.4% -0.4% -0.4% -1.6% Mining 3.5% 2.9% 2.2% 0.1% Manufacturing -1.5% -1.3% -1.0% 0.6% Electricity, Gas, Water and Waste 0.4% -0.3% 0.2% -0.9% Services Construction 1.6% 0.9% -0.2% -0.6% Wholesale Trade 1.8% 1.0% 1.0% 0.0% Retail Trade 1.4% 1.0% 0.9% 0.4% Accommodation and Food Services 1.5% 1.2% 1.6% 0.5% Transport, Postal and Warehousing 2.1% 1.8% 1.5% 0.8% Information Media and 1.9% 1.4% 1.6% 1.1% Telecommunications Financial and Insurance Services 2.7% 2.5% 2.2% 1.4% Rental, Hiring and Real Estate Services 2.2% 1.5% 1.0% 0.7% Professional, Scientific and Technical 3.8% 2.5% 3.0% 1.7% Services Administrative and Support Services 2.1% 1.2% 1.5% 0.5% Public Administration and Safety 1.4% 1.3% 1.5% 0.6% Education and Training 3.2% 3.1% 3.3% 2.1% Health Care and Social Assistance 3.5% 2.9% 3.4% 1.7% Arts and Recreation Services 2.2% 2.1% 2.3% 1.4% Other Services 1.1% 0.9% 1.0% -0.2% Total 2.0% 1.5% 1.6% 0.7% Source: Projections for employment growth across scenarios are less differentiated on an occupational basis with most occupations exposed to both fast growing and slow growing sectors. Across all scenarios, both professionals and community and personal service workers are expected to see employment growth rates which are notably above the average for each scenario. Note that the labour force modelling has been undertaken in far greater detail than summarised here. For each scenario we have developed employment projections at both the 3-digit ANZSIC level (for 240 industries) and 4-digit ANZSCO level (for 366 occupations) for each State and Territory. iii

Table ii: Projected occupational employment growth by scenario Average annual growth 2011-2025 Long boom Smart recovery ToT shock Ring of fire Managers 2.6% 2.2% 2.2% 1.5% Professionals 3.0% 2.4% 2.7% 1.5% Technicians and Trades Workers 1.1% 0.6% 0.4% -0.1% Community and Personal Service 3.0% 2.6% 3.0% 1.7% Workers Clerical and Administrative Workers 1.5% 1.0% 1.0% 0.2% Sales Workers 1.2% 0.8% 0.8% 0.2% Machinery Operators And Drivers 1.2% 0.8% 0.6% 0.0% Labourers 1.1% 0.6% 0.6% 0.1% Total 2.0% 1.5% 1.6% 0.7% Source: Estimate of replacement demand for those likely to be leaving the workforce permanently (through retirement) are also incorporated in the modelling, and these have also been estimated at the 4-digit ANZSCO level. Qualification profile To assess the future qualification implications of labour market demand, we utilise a profile of the typical qualification mix that is associated with specific industries and occupations. This represents recent information on average propensities to hold qualifications in most cases these are not necessarily a strict requirement in order to undertake a particular job. Recent data is drawn from the ABS Survey of Education and Work while qualification profile at the more detailed industry and occupational levels utilise information from the 2006 Census. The share of the workforce holding post-school qualifications has not remained static over time. For most occupations it has generally been increasing reflecting, amongst other things, productivity growth. The increase in the share of an employed group holding post-school qualifications over time is one component of skills deepening. This report includes projections for the qualification profile over time which are consistent with those historic skills deepening trends and with the expected outlook for labour productivity growth. The share of those employed with post-school qualifications was 59.8% in 2011. Going forward, by 2025: the long boom is projected to see 75.3% of those employed holding a post-school qualification; smart recovery is projected to see 70.5% of those employed holding a post-school qualification; terms of trade shock is projected to see 74.1% of those employed holding a post-school qualification; and ring of fire is projected to see 65.1% of those employed holding a post-school qualification. iv

The above data refers to a person s highest level post-school qualification. In developing demand projections for this report we also take account of multiple qualification holding, comprising: skills deepening subsequent qualifications which refers to an additional qualification gained at a higher level than previous qualifications (also called upskilling); and skills broadening which refers to additional post-school qualifications gained at the same or lower level than previous qualifications. Projected labour market demand for qualifications The implied labour market demand for qualifications is driven by the projected labour force growth aggregates and the projected qualification profiles, yielding the following projections: In the long boom by 2025 there are projected to be 11.3 million people employed holding a post-school qualification, an annual average increase of 3.7% from 2011. That represents more than 75% of the 15.1 million people projected to be employed in 2025 in the long boom. In smart recovery by 2025 there are projected to be 10.0 million people employed holding a post-school qualification, an annual average increase of 2.7% from 2011. That represents more than 70% of the 14.1 million people projected to be employed in 2025 in smart recovery. In terms of trade shock by 2025 there are projected to be 10.6 million people employed holding a post-school qualification, an annual average increase of 3.2% from 2011. That represents over 74% of the 14.3 million people projected to be employed in 2025 in terms of trade shock. In ring of fire by 2025 there are projected to be 8.3 million people employed holding a post-school qualification, an annual average increase of 1.4% from 2011. That represents over 65% of the 12.7 million people projected to be employed in 2025 in ring of fire. Further, accounting for the share of workers who hold more than one post-school qualification (and trend growth in such) yields the following projections for total qualifications for those employed: In the long boom by 2025 there are projected to be 19.9 million post-school qualifications held by those employed, an annual average increase of 4.3% from 2011. In the smart recovery by 2025 there are projected to be 17.2 million post-school qualifications held by those employed, an annual average increase of 3.2% from 2011. In the terms of trade shock by 2025 there are projected to be 18.4 million post-school qualifications held by those employed, an annual average increase of 3.8% from 2011. In ring of fire by 2025 there are projected to be 13.8 million post-school qualifications held by those employed, an annual average increase of 1.7% from 2011. Table iii provides a summary of additional qualifications demanded over by time by qualification level in each scenario. This is based on those employed, as well as additional qualification which might be required over time for those unemployed or not in the labour force. v

Table iii: Number of additional qualifications required by those employed, unemployed or not in the labour force Change in year (or annual average) 2015 2020 2025 FPA* Long boom Postgraduate 118.2 148.9 173.4 142.9 Undergraduate 266.4 315.4 338.3 302.7 Advanced diploma / Diploma 134.2 158.7 172.2 152.0 Certificate III and IV 236.9 267.7 227.7 248.2 Certificate I and II 56.7 60.9 60.1 58.8 Total 812.5 951.6 971.7 904.6 Smart recovery Postgraduate 86.6 122.4 139.4 115.1 Undergraduate 192.7 266.1 282.2 248.7 Advanced diploma / Diploma 101.0 130.5 140.4 123.0 Certificate III and IV 181.6 200.8 173.1 185.2 Certificate I and II 46.1 49.7 49.2 47.9 Total 608.1 769.5 784.3 719.9 Terms of trade shock Postgraduate 113.2 135.7 160.0 132.5 Undergraduate 250.4 286.7 312.9 278.7 Advanced diploma / Diploma 126.2 142.0 156.1 138.3 Certificate III and IV 203.9 227.0 189.9 211.1 Certificate I and II 50.5 51.9 52.1 51.0 Total 744.3 843.3 871.1 811.6 Ring of fire Postgraduate 64.6 75.9 84.0 74.4 Undergraduate 151.4 173.4 183.9 169.7 Advanced diploma / Diploma 80.4 85.1 89.9 84.4 Certificate III and IV 129.6 121.5 111.2 119.1 Certificate I and II 43.2 36.0 35.6 37.7 Total 469.3 492.0 504.6 485.3 * Forecast period average Source: We can also isolate the components of qualification demand between that generated by employment growth, that due to retirements, and that due to additional qualification attainment over time (skills deepening and skills broadening). The average change across individual years from 2011 to 2025 showed: In the long boom, 36% of qualification demand relates to employment growth, 6% stems from changing employment composition, 25% is replacement for retirement, 25% relates to skills deepening and 8% relates to skills broadening. In smart recovery, 33% of qualification demand relates to employment growth, 7% stems from changing employment composition, 34% is replacement for retirement, 20% relates to skills deepening and 6% relates to skills broadening. In terms of trade shock, 31% of qualification demand relates to employment growth, 7% stems from changing employment composition, 30% is replacement for retirement, 24% relates to skills deepening and 8% relates to skills broadening. vi

In ring of fire, 23% of qualification demand relates to employment growth, 8% stems from changing employment composition, 52% is replacement for retirement, 13% relates to skills deepening and 4% relates to skills broadening. Projected supply of qualifications In brief, there are two key sources of skills supply: Domestic student qualification completions: The number of new qualifications completed by domestic students. Net overseas migration: The qualifications held by individuals migrating to Australia, less those held by individuals emigrating from Australia. There are various influences on the supply of skills, including demographic trends, changes in Year 12 completion rates, the state of the labour market, and capacity issues. Utilising demographic model (DAE-DEM), we apply projections of population by age and location over time to current rates of domestic student qualification completion by age, location and qualification. This provides projections of the demographically-driven supply of qualifications from 2011 until 2025. In projecting domestic student completion profiles, a number of options were considered by. Given the desire to abstract from policy influences, a methodology which holds the completion rates by age constant (at their 2010 rates) over the forecast period was adopted. Projected completions are then largely driven by demographic change, although some economic impact variables also have an influence, as do some adjustments in higher education especially to account for the effects of demanddriven enrolments for which budget allocations have been made. Given the age profile for qualification completions, projected growth in the youth population (those aged 15-24) is particularly important for determining the future level of qualification attainment by domestic students. As has been the case in relatively recent history, the rate of population growth for the youth cohort temporarily turns negative in the ring of fire, terms of trade shock and smart recovery scenarios, influenced by lower net migration and a past weakening in the birth rate. A more recent lift in the birth rate (from the early 2000s) sees the rate of growth in the youth population start to increase across all scenarios between 2015 and 2020. vii

Chart ii: Projected growth in youth cohort (15-24) Change on year earlier 3.0% 2.5% 2.0% 1.5% 1.0% 0.5% 0.0% -0.5% -1.0% -1.5% 1995 2000 2005 2010 2015 2020 2025 Source: ABS 3101.0, Long boom Smart recovery ToT shock Ring of fire The total projected supply of qualifications represents the sum of qualifications completed by domestic students and the inflow of qualifications resulting from net migration. This data is shown in Table iv below. In all, the total number of qualifications projected to be supplied in 2025 ranges between 792,023 under the long boom scenario to 628,482 under the ring of fire. For all scenarios, domestic student completions represent the most significant component of total qualification supply. Under the long boom and smart recovery, net migration contributes around 12% of all qualifications in 2025. That compares to 9.8% for the terms of trade shock, and just 4.7% for the ring of fire. In the long boom, smart recovery and terms of trade shock scenarios, qualification supply is projected to increase over the forecast period. Under ring of fire, the total supply of qualifications at 2025 is projected to be around 1.1% lower than the 2010 level. viii

Table iv: Total projected supply of qualifications by scenario Projections 2010 2015 2020 2025 Long boom Postgraduate 70,195 86,671 91,145 93,258 Undergraduate 167,956 215,714 221,142 221,807 Adv. Diploma / Diploma 65,298 74,770 78,132 80,462 Certificate III / IV 226,888 244,229 258,238 271,808 Certificate I / II 105,171 111,455 116,783 124,687 Total 635,509 732,840 765,440 792,023 Smart recovery Postgraduate 70,195 80,668 85,823 88,446 Undergraduate 167,956 196,446 207,961 213,596 Adv. Diploma / Diploma 65,298 66,950 72,559 76,021 Certificate III / IV 226,888 236,050 248,056 261,459 Certificate I / II 105,171 107,905 112,954 120,832 Total 635,509 688,019 727,354 760,354 Terms of trade shock Postgraduate 70,195 83,077 84,199 85,290 Undergraduate 167,956 203,679 199,039 200,099 Adv. Diploma / Diploma 65,298 70,064 70,403 72,612 Certificate III / IV 226,888 239,817 247,359 258,393 Certificate I / II 105,171 109,534 112,237 119,356 Total 635,509 706,171 713,237 735,748 Ring of fire Postgraduate 70,195 80,223 76,042 72,070 Undergraduate 167,956 194,805 176,502 165,387 Adv. Diploma / Diploma 65,298 66,456 61,961 58,745 Certificate III / IV 226,888 234,930 231,379 227,145 Certificate I / II 105,171 107,728 106,265 105,135 Total 635,509 684,141 652,149 628,482 Source: Balance of supply and demand The supply-demand assessment is most readily done by comparing the flow of additional qualifications demand with the flow of additional qualifications supplied over a year. One can then look at the cumulative flow of qualifications demanded and qualifications supply over a longer period of time. Note that this does not seek to estimate any current undersupply or oversupply at the present time. For the purpose of this assessment, demand relates to qualifications for those employed, as well as additional qualifications which may be generated for those unemployed or not in the labour force. ix

Table v: Projected qualification supply less demand (based on labour force) by scenario and qualification type 2015 2020 2025 Long boom Postgraduate -31,577-57,797-80,096 Undergraduate -50,706-94,260-116,530 Adv. Diploma / Diploma -59,430-80,572-91,702 Certificate III / IV 7,318-9,415 44,070 Certificate I / II 54,744 55,881 64,623 Total -79,651-186,163-179,636 Smart recovery Postgraduate -5,960-36,540-50,917 Undergraduate 3,727-58,092-68,634 Adv. Diploma / Diploma -34,097-57,984-64,346 Certificate III / IV 54,489 47,233 88,356 Certificate I / II 61,791 63,262 71,619 Total 79,950-42,121-23,921 Terms of trade shock Postgraduate -30,112-51,489-74,694 Undergraduate -46,769-87,613-112,831 Adv. Diploma / Diploma -56,164-71,602-83,538 Certificate III / IV 35,909 20,336 68,463 Certificate I / II 58,992 60,305 67,237 Total -38,144-130,063-135,363 Ring of fire Postgraduate 15,613 157-11,980 Undergraduate 43,356 3,125-18,497 Adv. Diploma / Diploma -13,982-23,172-31,156 Certificate III / IV 105,345 109,834 115,960 Certificate I / II 64,496 70,242 69,522 Total 214,828 160,185 123,847 Source: In general, projections imply that the balance between supply and demand of qualifications will widen over time, with additional demand for qualifications growing more quickly than supply. That is particularly true for the long boom scenario, which is projected to see demand for qualifications outstrip supply throughout the forecast period. Demand is projected to exceed supply by almost 80,000 qualifications in 2015, rising to 186,000 in 2020 and nearly 180,000 in 2025. Across smart recovery and the ring of fire, weaker employment demand is expected to see the supply of qualifications increase by more than demand over the period to 2015. For terms of trade shock, strengthening demand is expected to lead to demand exceeding supply in 2025 by around 135,000 qualifications. The smart recovery scenario is expected to be more in balance in 2025 (with demand exceeding supply by around 23,000 qualifications), while the ring of fire is the only scenario which sees supply exceed demand throughout the forecast period (albeit at a declining rate). The net excess supply of around 215,000 in 2015 is projected to fall to net excess supply of around 124,000 in 2025. x

Demographics are a key reason for the sustained oversupply of qualifications in the ring of fire scenario. Although the rate of population growth does vary between scenarios, the size of the population is not dramatically different. As a result, the pool of individuals seeking qualifications is broadly of a similar size across the scenarios. Against that relatively stable supply side across scenarios, the demand side can vary notably, driven in large part by the expected rate of employment growth and productivity growth (the latter being a key driver of skills deepening). The trend across all scenarios is clear, with higher education qualifications (both postgraduate and undergraduate) and Diploma/Advanced Diploma qualifications shown to generally be in undersupply over time. Indeed, even under the ring of fire scenario (which is projected to result in a strong oversupply of qualifications overall across the forecast period), that is diminished towards the end of the forecast period. There is projected to be an oversupply of Certificate III/IV and Certificate I/II qualifications over much of the forecast period. In part this result reflects the recent policy success in increasing the rate of qualifications attained at the Certificate level. The higher participation in VET seen in 2010 (as a share of relevant population cohorts) forms the basis for supply projections at the Certificate level. Note also that the projections are of the difference between expected demand and supply are projections of the relative growth going forward. They say nothing about the relative state of demand for a qualification or occupation at the present time. Some qualifications and occupations may be characterised as experiencing undersupply or oversupply at present, but this report does not attempt to portray these characteristics it instead shows the direction of pressure going forward based on the scenario assumptions and parameters. Conclusions The broad results are intuitive. Regardless of the scenario, the supply of qualifications is likely to be reasonably steady over time, driven as it is largely by the size of the youth cohort (age 15-24), which tends not to change a lot from year to year. Net migration is a swing variable, but it is far less important in size than the domestic completion of qualifications. Yet on the demand side, there can be very large swings in demand from year to year, driven in large part in these projections by the rate of employment growth and the rate of productivity growth. This is also intuitive: A workforce of 11 million which is growing by 3.0% a year (as Australia s workforce did during 2010-11), where workers have an average propensity to hold post-school qualifications of 59.8% (Survey of Education and Work) and where on average those with post-school qualifications hold 1.61 of them (Survey of Education and Training), suggests an addition to the number of people employed of 330,000 people, and post-school qualifications required of 318,000. Yet if the same workforce sees growth of just 0.7% (as Australia s workforce did during 2011-12), that represents only an additional 77,000 people in employment and 74,000 additional post-school qualifications required. xi

Hence, large swings in implied labour market demand for qualifications do occur, and the scenarios examined here do show quite a spread of economic outcomes. Those large changes in implied labour market demand drive the results seen in the supply-demand comparison, which vary between a notable undersupply of qualifications in the long boom to an oversupply in ring of fire. The projections in this report are a reflection of the assumptions made for each of the scenarios. The data presented over the period 2010 to 2025 should not be considered forecasts. Rather, they should be viewed as projections and considered with regards to the assumptions described in this report. David Rumbens Partner xii

1 Introduction The Australian Workplace and Productivity Agency (AWPA) commissioned Deloitte Access Economics to undertake economic modelling which draws out the skills implications of a range of scenarios. The modelling examines both the demand for post-school qualifications (demand by industry) and the supply of new post-school qualifications (completions by domestic students and those provided through net migration). The modelling is conducted at both the national level and for each State/Territory with the focus of results in this report at the national level. The modelling focuses on the demand for and supply of formal post-school qualifications as reported in the DEEWR and NCVER collections. Qualifications are reported within the following categories: Postgraduate qualifications; Undergraduate qualifications; Advanced diploma / Diploma; Certificate III / Certificate IV; and Certificate I / Certificate II. The projections are presented within the context of four alternate scenarios developed by the AWPA in order to examine implications of different economic environments on skills development. The remainder of this report is structured as follows: Chapter 2 provides a macroeconomic view of each of the scenarios with reporting of key parameters. The parameterisation of the scenarios has been conducted by Deloitte Access Economics, in close conjunction with the AWPA. Chapter 3 provides projections of employment growth on an occupational basis, along with additional job openings generated as people permanently leave the labour force. Chapter 4 reports on the qualification profile of the workforce and how this is expected to change over time via additional skills deepening and skills broadening. Chapter 5 combines the projected labour force estimates with the expected qualification profile to provide the implied labour market demand for additional postschool qualifications over time. Chapter 6 then looks at the drivers of supply of additional post-school qualifications, profiling student participation in higher education and VET, as well as the skills provided via net overseas migration. Chapter 7 provides projections for the supply of skills based on the profiles discussed in chapter 6 and demographic projections for Australia, including net overseas migration. Chapter 8 compares the implied labour market demand for additional qualifications with the expected supply of additional qualifications from domestic students and net overseas migration. 13

Chapter 9 then provides some conclusions to the study, including limitations of the analysis and potential areas for further work. Finally, the Appendices provide detail on methodology and provide modelling results at a more detailed level. 14

2 Macroeconomic view To estimate the skills needs associated with each of the scenarios, they are converted into a series of macroeconomic and industry projections. Based on the scenarios and sensitivities around them, projections of the implied labour market demand for additional skills are then developed. In projecting the future economic path and its implications for qualifications for individuals, we need to determine: the size of the labour market (in terms of the total number of people employed); and the distribution of employment (in terms of industry profile). For each scenario, forecasts for key macro variables are developed using the Deloitte Access Economics Macro (DAEM) model, a small, dynamic model of the Australian economy which is regularly used in producing macroeconomic forecasts. 2.1 National economic view Key macroeconomic parameters for the scenarios are provided in the tables and charts below. The long boom scenario is largely based on the steady growth view of the Australian economy, consistent with budget projections from Federal Treasury. The stimulus coming to the Australian economy from China s economic boom is diluted over time, though that occurs at a slow rate - the terms of trade declines moderately over time but remains at levels over the next 15 years which are still high in historic terms. Imbalances in the European economies and elsewhere do not have a major effect over Australia s growth rate. Australia s economic and employment growth continues in a steady fashion over the forecast horizon to 2025. The smart recovery scenario is one where the current difficulties facing the Australian and global economies live on for several more years. Australia follows a low growth path to 2015, but after that date the global economy improves and Australia is able to move back towards its potential growth path. Indeed, the period of economic stagnation forms a trigger for greater take-up of technology and improvement in productivity. In the terms of trade shock scenario, the global economy continues to grow at a healthy rate over time. However, compared with the long boom, the benefits to Australia of this growth are reduced because there is a more substantial reduction in Australia s terms of trade. Australia s mining sector still enjoys a significant expansion in this scenario, but the returns on that expansion to the national economy are far less than if the terms of trade had remained high. 15

The ring of fire scenario combines a lower global growth path over time with significant volatility. Business and consumer confidence in future economic performance is lowest in this scenario, where economic growth on average is more modest and a notable economic cycle occurs. Increased protectionism reduces trade between countries and stunts productivity growth. Table 2.1 provides a summary of key economic variables across the four scenarios. Table 2.1: Summary assumptions by scenario Variable (average 2011- History Smart Long Boom 2025 unless stated) (avg 2001-11) Recovery ToT shock Ring of fire Terms of trade (level in 87.5 88.0 85.0 67.0 73.2 2025 for forecasts) Net migration (persons) 176,000 235,000 191,000 187,000 128,000 Population growth (%) 1.54% 1.58% 1.32% 1.28% 0.99% Labour force participation 64.8% 69.2% 66.9% 67.3% 63.6% rate (level in 2025 for forecasts) Unemployment rate 5.3% 5.0% 5.3% 5.0% 6.6% Employment growth 2.32% 1.99% 1.52% 1.59% 0.75% Productivity growth 0.72% 1.86% 1.30% 1.61% 0.59% Output growth 3.06% 3.89% 2.85% 3.23% 1.35% Output per capita growth 1.50% 2.26% 1.51% 1.93% 0.39% Nominal GNI per capita 5.34% 4.28% 3.54% 3.15% 2.06% growth Real GNI per capita growth 2.46% 1.69% 0.93% 0.57% -0.55% Source: ABS, The charts below show a profile over time for key economic variables under each of the scenarios. 2.1.2 Terms of trade Chart 2.1 shows Australia s terms of trade, with the profile for the long boom consistent with medium term projections by Federal Treasury. Smart recovery has a more significant decline in the terms of trade to 2018, following which stronger global demand for resources is restored, consistent with a return to a stronger growth path for the global economy. The ring of fire also has a significant decline in the terms of trade to 2018, after which it then follows a more variable path. Finally, terms of trade shock sees a notable drop in the terms of trade level from 2012 to 2018 and then tracks a lower path (one which is based on the average terms of trade seen from 1995 to 2005 the period before the current resources boom). 16

Chart 2.1: Terms of trade index 140 Terms of Trade 120 100 80 60 40 20 0 Jun 1995 Jun 2000 Jun 2005 Jun 2010 Jun 2015 Jun 2020 Jun 2025 Long Boom Smart Recovery ToT shock Ring of fire Source: ABS 5206.0, 2.1.3 Population There has been a link between Australia s terms of trade and levels of net overseas migration and that comes through in some scenarios (but in others that link is seen to break down). The profile for net overseas migration is shown in Chart 2.2. The long boom sees high net migration sustained alongside a high level for the terms of trade. Smart recovery sees lower net migration during the period where economic weakness is sustained (to 2015) but then picks up to a higher level thereafter. Ring of fire sees net migration pushing lower over time and is also more variable. Finally, while the terms of trade is indeed low in terms of trade shock, the implications for net migration are not as severe as that might suggest the rest of the economy is still performing well so net overseas migration retains a reasonable level. 17