The objective of this Note is toinvestigate the skills that formal sector Zambian firmsdemand, the skill deficits they face, the strategies thatfirms may use to mitigate skill deficits, and their impactson firm performance. The Note addressed these issues byestimating a multi-equation skills demand model, usingStructural Equation Modeling (SEM) methods, on unique dataof 350 formal sector firms developed and fielded jointlywith the Enterprise Survey Unit of the Development EconomicsVice Presidency (DEC). The skills demand model relatedseveral latent constructs—organizational capital that drivesskills demand, skill gaps as perceived by employers, andskill strategies—to firm-level productivity and wageoutcomes. The findings are consistent with the predictionsof the new productivity literature, skill-biasedtechnological change, and research on education andtraining. First, ostensibly similar firms of the same sizewithin the same sector can have very different skill needsand skill strategies that affect firm performance. Thefirm’s organizational capital (know-how) drives skillsdemand which, in the short term, is manifested in skilldeficits and in firm strategies to mitigate skill gaps andrespond to demand. High-skills demand firms, such as thosethat innovate or export, face greater deficiencies inworkers’ cognitive and non-cognitive skills that poseoperational constraints for use of technology, innovation,quality, and production. Some firms, but not others, respondwith skill strategies to fill job vacancies, hire skilledexpatriates, provide in-service training, and outsourceprofessional services. They also employ a more skilledworkforce with a higher share of tertiary-educated andTEVET-credentialed workers, and workers in management,professional, and technician occupations. Second, productionfunction estimates revealed that skill deficits negativelyaffect labor productivity while responsive skill strategiesimprove productivity outcomes. Interestingly, organizationcapital only affects productivity through its effect onincreasing skills demand and thus expanding the gap betweendesired and available skills and on eliciting skillstrategies from some firms but not others to address theseskills gaps. The endogenous choice to deploy skillstrategies was addressed using an instrumental variablemeasuring the density of access to skill sources for firmslocated in different regions and sectors. Instrumenting forskill strategies increased our estimates of the causalimpact of skill strategies on labor productivity. Finally,improvements in labor productivity are associated withhigher firm-level wages. In wage equations controlling forskills composition of the workforce, industry and location,firms with higher labor productivity paid significantlyhigher average wages, roughly equivalent to two-thirds ofthe higher labor productivity. Like the production functionresults, skill gaps are associated with lower average wageswhile skill strategies improve wage outcomes. This result isconsistent with the hypothesis that high skills-demandingfirms and firms investing in the skills of their currentworkforce pay wage premiums to attract, reward, and retaintheir most skilled workers. Wage levels are lower on averagein manufacturing relative to service sectors, and inLusaka-based firms, as compared to firms outside Lusakawhich face greater skill shortages.
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