Speaking with managers of companies operating in Georgia, one frequently hears complaints about a lack of certain specialists in the Georgian labor market. For instance, firms operating in the construction sector are often forced to hire foreign experts, as they do not find sufficiently qualified engineers and architects in Georgia. The shortage is particularly pressing in technical subjects and the sciences.

The mere existence of this problem contradicts conventional economic wisdom. If there are certain qualifications not available in the labor market in sufficient amounts, the recommendation of orthodox economics would be to do nothing. Then the market forces would kick in, drive up wages in the undersupplied fields, and young people would be more inclined to choose the demanded qualifications. Soon, the gap would close.

Yet it turns out that skill shortages do not always disappear when the labor market is left alone. One reason for this is that governments are usually heavily engaged in the educational sector, and when universities are run by the government, the amounts of places they offer in each subject results from administrative and political decisions that do not reflect the true demand. Under such circumstances, the educational system may become a bottleneck for the labor market. A lack of capacities at the universities may curtail the supply of certain qualifications even if wages are high and many people would be willing to study the demanded subjects. Such a situation occurred in Israel some years ago, when medical doctors were “imported” from Ukraine because the Israeli medical schools did not produce enough physicians.

Note that a skills shortage would not persist for long in a fully private education system. The excess demand, say, for engineers would raise engineers’ wages, inducing more people to study engineering. The higher demand would cause the price for studying engineering  (the tuition payments) to increase. The private universities, aiming to maximize profits, would react by expanding their capacities in engineering, where they could now charge higher tuition fees.

It is not clear whether the lack of specialists in Georgia primarily results from an educational bottleneck. It looks as if the idiosyncratic way Georgians make their educational choices is also an important factor (see the articles “The Educational Choices we make” by Eric Livny and “Education that Matters” by Nino Abashidze, both to be found on the ISET Economist Blog). However, the government of Georgia is heavily engaged in the educational system, not only by providing public universities (e.g. the Tbilisi State University), but also through various regulations (for example regarding the tuition payments that may be charged), and by providing scholarships to some students and subsidizing certain subjects. For example, in response to the perceived shortage of specialists in certain areas, the government decided to cover the tuition payments for the students of 17 subjects, among them many technical disciplines. Whenever there is so much government intervention, it is very likely that there will be distortions and deviations from a market outcome.

So, what can a country do to resolve an educational bottleneck?

A SIMULATED MARKET

In the 1990s, Ireland was suffering from a lack of science and engineering graduates, similar to the problems Georgia faces today. As their educational institutions are governmental and their labor market is largely liberalized, they suspected an educational bottleneck to be the culprit. Not willing to privatize their educational institutions on a large scale, they rather tried to answer the counterfactual question of what would be the market outcome if the labor market would be left alone, and then adjust their public system accordingly. To this end, they deployed their Industrial Development Agency (IDA) to estimate what would be the numbers of enrolled students in each subject if the government would keep out of the education sector. Computing such an “artificial” demand is something economists regularly do when real markets are missing, very often on behalf of governments aiming to optimize their educational sectors (the ISET Policy Institute is currently estimating the artificial demand for vocational training of unemployed Georgians as part of a project funded by the World Bank).

As a result of their analyses in the 1990s, Ireland established technical colleges in the rural regions and upgraded their universities in the demanded subjects. Also afterward, the IDA continued to adjust the universities’ capacities in different subjects, based on a regular projection of the future skill needs of the Irish economy. In this way, Ireland succeeded to get rid of its skills shortage.

THE REAL MARKET

In the 1980s, the Pohang Iron and Steel Company (POSCO) of Korea was suffering from shortages of engineers and physicists. Not waiting further for the government, in 1986 the company established the Pohang University of Science and Technology (POSTECH) which, while originally founded to serve private interests, today has become one of the best technical universities in all of Asia.

Governments cannot force companies to found universities, but they can provide a legal environment that is friendly towards private activities in the education sector. Moreover, they can subsidize private universities, either by direct payments or by covering the tuition fees for a certain number of students.

Yet universities founded by private companies do not always acquire academic credentials like POSTECH. Often, they do not even deserve the name university, as they are mere company training centers without academic ambitions. The reason for this is straightforward. For research to have academic value, it must be a relevant contribution to the knowledge of humankind. Research that is only relevant for the company that funds the university, like improvements in the way the company is organized or its production processes, would not be accepted for publication in academic journals. And even if such research would have general relevance, the funding company would have the interest to keep it undisclosed and prevent its publication.

A company planning to launch its own university in Georgia would have to solve a couple of problems. Besides the challenges to meet academic standards, it would also not be easy to find qualified faculty. If the instructors would be practitioners from Georgian businesses, they would have a lot of practical understanding but little academic caliber. If they were academics, then they would have to be recruited from the same pool of people that also work for public universities, at least if the lectures were to be taught in Georgia. In that case, some of the shortages of public education would carry over to the new university. The only way out would be to fly in foreign specialists from abroad, which is an expensive option.