Aligning skill supply and skill demand: The challenges

In many countries, the responsibility for aligning skills development with labour market needs is gradually shifting from government to individuals and employers as the importance of cost-sharing and market mechanisms for allocating resources grows. However, an increased reliance on the market also brings a number of risks. In particular, it raises the risk of market failure. In this context, this chapter argues that governments will continue to play an important role in matching skills demand to supply – although the nature of this role is likely to be different. More specifically, this role becomes more indirect and will increasingly consist in “steering” the system and “nudging” institutions, individuals and firms, rather than exercising tight control over the quantity and type of skills that are provided and acquired. While there are many ways in which governments can do this, one key mechanism is the use of financial incentives.