The shortage of skilled workers in the digital industry – status quo and consequences

Radical structural changes and basic innovations have the power to trigger long-lasting changes in all areas of life. In recent years, digitalisation has shown us how quickly and extensively this change can occur in the economy and society. Mind you, the transformation is far from complete: that which is proven is still being tested and is continuously being replaced by the new. Disruption is therefore still in full swing and is being further fuelled by additional challenges such as climate change and demographics.

But change in itself is no matter of course. A successful transformation requires the ability to rapidly adapt to dynamic environmental conditions and places high demands on innovative ability. This applies to both companies and the national economy. Accordingly, building digital expertise is inherent for companies and of particular importance for international competitiveness. With innovative spirit, a willingness to take risks and the corresponding (human) capital, it should be possible to successfully master this transformation. In truth, however, the reality is different. A shortage of the scarcest ingredient constitutes an obstacle: the shortage of skilled workers in the digital industry.

Status quo – the central drivers of transformation

According to the German Economic Institute, four key changes are having a disruptive effect on the German economy’s business model and pose challenges that need to be overcome (the four Ds): digitalisation, decarbonisation, demographics and deglobalisation. A look at the terminology makes the virulence of the shortage of skilled workers clearer.

Digitalisation

Data-driven, digital business models are becoming increasingly important for the economy. Realising them requires a high level of digital expertise and necessitates specialist knowledge in order to offer marketable and benefit-oriented solutions. Particularly for small and medium-sized companies – which account for about 99.4 per cent of companies in Germany – the shortage of suitable skilled workers constitutes a major obstacle. According to the projections of the German Economic Institute, 40 per cent of German companies expect a growing demand for IT experts in the next five years and 54 per cent of them expect the same for IT specialists. Among innovating companies, 52 per cent even anticipate a growing demand for IT expertise and 66 per cent anticipate the same for IT specialists.

Decarbonisation

Climate change will be the Herculean task of our time in the coming decades and force a rethink in the economy and society. Digital technologies and innovations are key drivers for improving energy and resource efficiency. IT experts are indispensable when it comes to developing climate-friendly technologies and products. Projections show that the demand for expertise to develop climate-friendly technologies will increase significantly in the coming years. For example, 19 per cent of companies expect an increasing demand for (environmental) engineers in the next five years. In innovating companies, 38 per cent expect this same increase for IT experts and 24 per cent for (environmental) engineers. Other STEM expertise is also desperately needed.

Demographics

According to Germany’s current 2022 STEM Spring Report (MINT-Herbstreport 2022), 64,700 STEM academics leave the labour market for reasons of age. The German Economics Institute’s projections for the next five years show that the annual demographic replacement demand will increase by 7,400 individuals to a total of 72,100. Even with new graduates, the demand is not fully offset: in the STEM sector, about two-thirds of graduates are currently needed just to meet the replacement demand. This means they are not available for further growth in employment. For STEM specialists, the current demographic replacement demand amounts to around 274,000 and will increase by around 17,900 to 291,900 in five years. The figures imply that with the current number of graduates, we in Germany fall significantly short of meeting the demographic replacement demand. Overall, this means the annual demographic replacement demand for STEM specialists increases by 25,300. This development makes it clear that with the given scarce resources in the respective key digital industries, growth will only be possible to a limited extent.

Deglobalisation

Effects of the pandemic, disrupted supply chains, the war in Ukraine and rising energy prices go hand in hand with a high degree of uncertainty on a global level. One possible countermeasure is to improve resilience by investing in future-proof research and development projects. Consequently, many companies are under high pressure to adapt to changing framework conditions via innovations and new business models and to strengthen their resilience against exogenous shocks. In 2019, about 77 per cent of those employed in the field of research and development (R&D) had a STEM qualification. If R&D expenditure as a percentage of GDP increases to 3.5 per cent, this alone will increase the STEM demand in Germany by more than 50,000 people.

Germany currently lacks around 326,100 workers in the STEM sector

A look at the current labour market figures reveals the acute demand: in October 2022, the STEM gap reached one of its highest levels for the month of October with a total shortage of around 326,100 workers. For companies, this gap implies an fundamental risk. This is because the lack of suitable skilled workers sets companies back and not only slows down the emergence of necessary innovations and research activities, but it also prevents ongoing value creation processes from running smoothly. This shortage recently saw a sharp rise, particularly in the IT sector and with occupations in energy technology and electrical engineering. This is an explosive development that can have serious consequences if no countermeasures are taken.

The facts concerning the labour market are clear indicators that the shortage of skilled workers is not just a matter of mere prophecies of doom. A look at the developments makes it clear that the long-term gap will have a strong impact on corporate success and international competitiveness if no countermeasures are taken. A lot of companies these days are already talking about the ‘biggest business risk of the future’.

What are the potential consequences?

Both the current figures and the projections send clear signals that if concrete countermeasures are not taken, the growing shortage will continue to worsen. The shortage of skilled workers will not, however, remain without consequences – neither for companies nor for national economies. As the economic impact increases, the negative consequences of the shortage of skilled workers will become more visible, which may manifest as follows:

• Loss of competitiveness and innovative strength in key digital industries
• Rising labour costs and additional workload in ongoing operations
• Loss of growth and revenue due to limited supply or rejecting orders
• Decrease in productivity and disruption of value creation
• Long-term welfare losses in the economy and society
• Delayed or insufficient self-efficacy in the face of key challenges presented by structural change (climate, digitalisation)
• War for talent
• Decline in international competitiveness

Conclusion

The cause-effect relationships in the economy are rarely monocausal. This applies to the labour market, too. The increasing demand for digital specialists is being exacerbated by the growing shortage of qualified experts as well as demographic change. At the same time, global challenges such as climate protection (decarbonisation) and rising energy costs are increasing the demand for STEM professionals in the labour market. Additional innovations are only possible with appropriately qualified employees. However, since they are available only to a limited extent and the demand is not being satisfied, bottlenecks are forming which will further exacerbate the shortage on the labour market.

In the future, we will notice that widespread measures will have to be taken to curb the negative consequences of this development. That being said, concrete proposals such as targeted immigration, increasing the attractiveness of STEM professions for women and improving educational opportunities for children and youths are already being discussed as possible solutions. Whether this is all merely lip service or not is something we will all observe together.