For a Free Copy of the Full ReportContact:

Ogriaznova@worldbank.org or write to World Bank Office,

address: 1, Dniprovskiy Uzviz, 2nd Floor, Kyiv, 01010 Ukraine

3

Overview1

Key Findings• Ukrainianemployersdemandadvancedcognitive,socio-emotional,andtechnicalskills.• Existingformaleducationandtrainingsystemshavebeenslowtoadapttonewskill demands.• AdhocandunevennatureofpolicyreformsinUkrainehasledtooutdatededucation, training,andlabormarketsystems.

Policy Agenda• Buildfoundationalskillsfornewlabormarketentrants.• Enhancethequalityofhighereducationandemploymentinstitutionstobuildadvanced skillsofthecurrentworking-agepopulationandfutureworkers.• Improvetheinstitutionalenvironmenttoeasetheuseofcurrentworkforce’sskills.

A Tortuous Transition from a Soviet to a Prosperous Modern Economy

Ukraine’s promising economic potential after its independence in 1991 has not translated into broad-based prosperity.Itishometoarangeofnaturalresourcesandindustriesandaworkforcewithrelativelyhigheducationalattainment, inheritedfromtheSovietlegacy.Intheearly1990s,Ukrainehadlevelsofgrossdomesticproduct(GDP)percapitathatweresimilartoothermiddle-in-come(peer)countrieslikeBrazil,Poland,orTurkey.Today,Ukrainiansstillhaverelativelyhighlit-eracyrates,highnumbersofuniversitystudents,andsignificantnumbersofgraduatescontributingtoindustrialandscientificprogress(WorldBank2011a).However,economicperformanceremainstenuousatbest,productivitylevelsamongtheworkforcearelowcomparedtopeercountries,andstandardoflivingfortheaverageUkrainianin2015islowerthantheywere25yearsago.

One of the main causes for the disappointing economic performance is the lack or slow pace of reform, especially among policies which regulate labor markets and education and training institu-tions.Thelaborregulatorycodecontainsmanypre-transitionfeaturesasitwasdraftedin1971andamendedonlymarginallyovertheyears.Theabsenceofadaptionsinlabormarketlawslim-itsincentivesforfirmstohireandgrowandleadstoformsofsuboptimalworkforceallocationssuchasinformalemployment,underemployment,andwagearrears.Meanwhile,stagnationinvocational and post-secondary level instruction is hindering the ability of training and edu-cationinstitutionstoberesponsivetofast-changinglabormarketneeds.Underfinancingandlimitedtechnicalcapacityofstakeholdershaveconstrainedtheimplementationreforms,whentheywereapproved,andtheireffectivenessisunclear.Structuralissuessuchasthefastpaceofdeclineandlowinternalmobilityofthelaborforceareadditionalchallenges.Asaresultofthesefactors,Ukraineroughlyranksinthebottomtierofcountriesaroundtheglobeinindicatorsrat-ingtheeaseofdoingbusiness,whichisbelowmostotherEasternEuropeanandCentralAsiancountries—96thplaceoutof189countriesin2014(WorldBank2014a).

1 This report was prepared by a team comprising Ximena Del Carpio, Olga Kupets, Noel Muller, and Anna Olefir. Employer STEP data was col-lected jointly with the OECD Eurasia competitiveness Program (task led by Gabriela Miranda).

For a Free Copy of the Full ReportContact:

Ogriaznova@worldbank.org or write to World Bank Office,

address: 1, Dniprovskiy Uzviz, 2nd Floor, Kyiv, 01010 Ukraine

4

On top of structural issues, the ongoing conflict in the eastern regions of the country, jointly with an economic downturn, further weakens labor market prospects and economic performance more broadly. Since the beginning of the conflict in February 2014, employment losses havebeenconsiderableduetotheexclusionofemploymentopportunitiesfromtheAutonomousRe-publicofCrimeaandSevastopolCityandquasicessationofeconomicactivitiesintheDonbasregion,animportantminingextractionandmanufacturingareainthecountry.IntheDonbasregionalone,800,000jobswerelost.OveramillionpeoplemigratedtootherUkrainianregionsorneighboringcountries;theyarereferredasInternallyDisplacedPeople(IDP).Asignificantshareofemploymentadjustmenthasalsotakenplacewithinfirmsthroughreducedhours,un-paidadministrativeleave,andwagedeferrals(orarrears)–reportedwagearrearsincreasedin2014fromUAH753milliontoUAH2,437million.

Building Skills to Boost Employment and Productivity

Investing in workers’ skills would provide a way to improve productivity and restore compet-itiveness, to boost economic growth and prosperity. Theimportanceofskills,beyondformaled-ucationalachievement, in fosteringemploymentandproductivityhasbeendocumentedbyalargebodyofempiricalworkinitiatedintheearly2000s2.Fosteringskills–people’smalleableabilitiestoperformtasksandrespondtosituations–increasestheemployabilityofthelaborforce,enablesworkerstocarryouttheirjobmoreefficiently,usenewtechnologyandinnovate,andallowsfirmstoprogressuptheindustries’valuechains(WorldBank2010,2012;Ariasetal.2014).Abetterskillsdevelopmentstrategyhasthepotentialtoovercomestructuralchallengesbyimprovingfirms’performanceandproductivityoftheUkrainianeconomy.

Figure 1. A Framework for Cognitive, Socio-emotional, and Technical Skills

-

Basic cognitive

Basic academic knowledge such

as literacy or numeracy

CognitiveMental abilities to

engage in comprehen-sion and reasoning,

and acquire knowledge

Socio-emotionalBehaviors and attitudes

that enable individuals to navigate personal and social situations effectively, as to manage emotions, relate with others and set goals

TechnicalJob-specific knowledge

(like of methods, materials, and tools) and manual dexterity

Advancedcognitiv

Complex thinking such as critical

thinking or problem solving

Beliefs,attitudes,

aspirationsSelf-theories

(Growth vs. fixed mindsets)

Personalitytraits

Broad facets relatively stable

over time

BehaviorsConsistent patterns of

thoughts, feeling, and conduct

Sources: Authors’ elaboration based on Almlund et al. (2011); Borghans et al. (2008); Roberts (2009); OECD (2015).

2 See reviews by Borghans et al. (2008), Almlund et al. (2011), Kautz et al. (2014), OECD (2015).

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Skills are broadly defined as individual characteristics that are malleable through changes in learning environments and investments. Schoolsareaprivilegedplacebutnottheonlyonewhereskillsareformed.Thefullspectrumofaperson’sskillsisalsoinfluencedbyotherfactorssuchasfamilybackground,work,extracurricularactivities,andenvironment.Thetermskillsrefersto“competencies,attitudes,beliefs,andbehaviorsthataremalleable(modifiable)acrossanindi-vidual’sdevelopmentandcanbelearnedandimprovedthroughspecificprogramsandpolicies”(Guerraetal.2014).Skillsaremulti-dimensionalandcanbecategorizedintothreebroadover-lappingsets:cognitive,socio-emotional,andtechnicalskills,whichcansuccinctlybedefinedasfollows(Figure1):

• Cognitive skills canbedefinedasintelligenceormentalabilities;theyincludebasicaca-demicknowledge(likeliteracy)andmorecomplexthinking(likecriticalthinkingorproblemsolving).

• Socio-emotional skillsarebehaviors,attitudes,andpersonalitytraitsthatenableindividu-alstonavigatepersonalandsocialsituationseffectively(likemanagingemotions,workingwithothers).

• Technical skillscanbedefinedasspecificknowledgetocarryoutone’sjob(likerepairingelectronicequipmentordesigning)andpsychomotorandmanualdexterity.

Despite the clear relevance of the skills agenda for employment, productivity, and living standards in Ukraine, there has been little up-to-date or granular evidence before this report to guide policy priorities in the country. Withthisinmind,theanalysisandevidencepresentedinthisreportmainlydrawonnewmicro-datasetsthatallowforamoredetailedunderstand-ingofthedistributionofcognitive,technical,andsocio-emotionalskillsamongthework-ing-agepopulationandthose skills thatemployers look for in thecountry.These surveyswerecreatedunderthe Skills Toward Employment and Productivity (STEP)measurementini-tiativeoftheWorldBankandallowcross-countrycomparisonswhereSTEPsurveyshavebeencompleted.Thisstudyalsoreliesonauniquedatasetofjobvacanciesfrompublicandprivateportals,allowingtodrawjobrequirementsforabroaderrangeofsectorsthanpro-videdbythefirmsurvey.

Employers Demand Advanced Cognitive, Socio-emotional, and Technical Skills

Skill gaps significantly constrain firms’ performance in Ukraine.Ina2014surveyoffourkeysectors,4firmsoutof10reportedasignificantgapbetweenthetypeofskillstheiremploy-eeshaveandthosetheyneedtoachievebusinessobjectives.Thisisthecaseforroughlyhalfofthefirmsinthefoodprocessingandintheinformationandcommunicationtechnologies(ICT)sector–onethatmostlyhiresworkerswithpost-secondaryeducationlevels.Thelackofrequiredskillsoftheiremployeesarelesssalientintherenewableenergysectorandamongagribusinessgrowers,butatleastoneoutoffivefirmsinthesetwosectorsreportsfacingthisissue.Skillgapslimitthecompany’sefficiency,servicequality,andabilitytoretainandgrowitsclientbase(Figure2).Also,skillgapsareimpedingfirmsfromfindingtherightcandidateforthejobinthehiringprocess,especiallyinthehigher-skilledoccupationsandinoccupa-tionalcategoriesthatrequireworkerstopossessjob-specifictechnicalskillswhentheystartworking.

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Figure 2.Reported Consequences of Skill Gaps on Firms in Four Key SectorsShare of Firms Reporting that Skill Gaps Caused a Given Business Problem, %

Agribusiness growers Agribusiness food processors Renewable energy Information technology

0

5

10

15

20

25

30

35

40

45

Loss of efficiencyand increased wastage

Lossof service quality

Loss of existing clients or markets

Loss of new clients or markets

Increased recruitment costs

Loss of innovation opportunities

Source: Ukraine STEP Employer Survey 2014.

Note: ‘Skill Gaps’ refers to the breach between the type of skills a firm’s employees have and those it needs to achieve business

objectives.

What are these skills that employers value and lament the lack thereof? Most demanded skills include a mix of technical, socio-emotional, and advanced cognitive skills. Insightsfromafirmsur-veyandadatasetof2015jobvacanciesshowthatadvancedcognitiveskillsthatallowworkerstoanalyzeandsolveproblems,managetheirtime,gainnewknowledgeandlearnnewmethods,andcommunicateeffectively,arehighlydemandedinUkraine(Table1).Employersnotonlylookforworkerswhothinkwellbutalsoforthosewhodemonstratesocio-emotionalskillsthathelpmanageone’semotionsandbehaviors(likeself-management,resilience,ethics),goalsettingandwillingnesstolearn(achievementmotivation),andtheabilitytoworkwithothers(teamwork).Acoresetoftechnicalskillsishardertodefineastheyoftenareoccupation-orjob-specificandtheonlysourceofdetailedtechnicalskills,thejobvacancydataset,tendstotargethigher-skilledoccupations.Yet,likesalesskills,knowledgeofmarketsandproducts,andadvancedcomputingskillsaredemandedinarangeofoccupations.

Table 1. Frequent Skill Requirements in Job Vacancies, March 2015

Cognitive Socio-emotional Technical

Communication Responsibility Salesskills

Learning Stressresistance Knowledgeofmarketsandproducts

Timemanagement Self-management Analyticalmethods

Analyticalskills Goalorientation Proficiencyinfield-specificsoftware

Foreignlanguages Teamwork Knowledgeoflegislations

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Cognitive Socio-emotional Technical

Multi-tasking Negotiation Webprogramming

Criticalthinking Organization Design

Problemsolving Professionalism Driving

Decisionmaking Teamwork Basiccomputertools

Source: Authors’ compilation of job vacancies from Head Hunter online portal (2015).

Note: The table features examples of skills frequently cited as requirement in a sample of job vacancies rather than a strict rank-

ing of these skills. Other frequently cited socio-emotional skills include cooperation (agreeableness), accuracy (detail orientation),

leadership, and perseverance. The Head Hunter portal tends to target high-skilled occupations and therefore skill requirements may

be more representative of these types of occupations.

Most valued skills are consistent across sectors and types of occupations. Employers fromfour key sectors rank virtually the same top 5 skills out of 14 options: job-specific techni-cal skills (technical skills), professional behavior (socio-emotional skill), problem solving(advanced cognitive skill), the ability to work independently (socio-emotional skill), andteamwork(socio-emotionalskill)(Table2).Theseskillsarevirtuallyequally important forbothhigh-skilledoccupations(likemanagers)andlow-andmiddle-skilledoccupations(likeclerks).Thisuniformityisremarkablegiventhediversityofthesesectorswithregardtolo-cation,size,numberofjobstheyrepresent,theiroccupationalstructure,andtheextenttheyreportbeingaffectedbyskillgaps.Forexample,demandforlower-skilledoccupationsinag-ricultureisprominentwhileothersectorslikeinformationtechnologyandrenewableenergyexpressacleardemandforworkersinhigher-skilledoccupations,especiallyinmanagerialandprofessionaloccupations.

Table 2. Overview of Firms’ Skill and Labor Needs and Gaps for Four Key Sectors

Agribusiness

growersAgribusiness

food processorsRenewable

energyInformation technology

Main regions of location

Dnipropetrovsk

Odessa

Mykolaiv

KyivCityandOblast

Dnipropetrovsk

Kharkiv

KyivCity

Lviv

Cherkasy

Kyiv

Kharkiv

Dnipropetrovsk

5 most valued skills

1.Job-specifictechnical

2.Professionalbehavior

3.Problemsolving

4.Abilitytoworkindependently

5.Teamwork

1.Job-specifictechnical

2.Professionalbehavior

3.Problemsolv-ing

4.Teamwork

5.Abilitytoworkinde-pendently

1.Job-specifictechnical

2.Problemsolv-ing

3.Creativeandcriticalthinking

4.Professionalbehavior

5.Teamwork

1.Job-specifictechnical

2.Problemsolv-ing

3.Professionalbehavior

4.Abilitytoworkinde-pendently

5.Teamwork

8

Agribusiness

growersAgribusiness

food processorsRenewable

energyInformation technology

% of firms re-port ing a sig-nificant skills gap in their workforce

48 45 29 21

3 most de-manded occu-pation catego-ries

1.Laborers

2.Machineoper-ators

3.Technicians

1.Laborers

2.Technicians

3.Machineoper-ators

1.Professionals

2.Craftsperson

3.Laborers

1.Professionals

2.Technicians

3.Clerks

3 occupation categories with major skill gaps*

1.Machineoper-ators

2.Craftspersons

3.Skilledagricul-turalworkers

1.Craftspersons

2.Technicians

3.Machineoper-ators

1.Technicians

2.Professionals

3.Clerks

1.Professionals

2.Technicians

3.Clerks

Specific occu-pations with major skill gaps**

1.Laborer

2.Tractordriver

3.Animalproduc-ers

4.Repairman

5.Veterinarian

1.Laborer

2.Serviceandshopworkers

3.Associatepro-fessionalsinfoodtechnology

4.Bakersandpastry-cooks

5.Shopassistant

1.Diversema-chineoperators

2.Cartographersandsurveyors

3.Civilengi-neers

4.Geologistsandgeophysi-cists

5.Technologyguidebioenergyinstaller

1.Computerassistants

2.Programmers

3.Serviceandshopworkers

4.Computersystemdesignersandanalysts

5.Diverseclerks

Source: Authors’ compilation based on Ukraine’s STEP Employer Survey 2014.

Notes : *1-digit ISCO classification; ** 5-digit ISCO classification.

Skills and Labor Market Outcomes of Urban Ukrainians

A 2012 Household Skills Survey in urban areas permits to explore the level of measures of Ukrainian adults’ cognitive and socio-emotional skills. Overall,theUkrainiansfromurbanareashavegoodbasiccognitiveskills(measuringtheabilitytoevaluateandreflectfromwrittentext),whichareequiva-lentonaveragetoOECDcountriesandhigherthanallmiddle-incomecountrieswithcomparabledata.Levelsofbasiccognitiveskillsofurbanadultsarerelativelywelldistributedacrossdemograph-icgroupsbutlargegapsexistacrossgenerations:adultseducatedduringthetransitionyears(34–45yearsoldin2014)havesignificantlylowaveragelevelsofbasiccognitiveskillsthantheirolderoryoungerpeers(Figure3).Differencesinsocio-emotionalskillsacrossage,gender,oreducationallev-elaremodestandlevelsoftheseskillscannotbemeaningfullycomparedacrosscountries.

9

Figure 3. Average Reading Proficiency Levels by 10-year Age Groups, By Country

24015-24 25-34 35-44 45-54 55-64

245

250

255

260

265

270

275

280

285

290

OECD-23Urban Ukraine

Urban ArmeniaUrban Georgia

Sources: World Bank STEP calculations for Armenia and Georgia STEP Household Sur-veys 2013. Authors’ calculations for Ukraine based on ULMS-STEP Household Survey 2012. OECD’s calculation for OECD-23 based on PIAAC data (2008–2013).

Ukrainian workers who possess high levels of skills-mainly those with high socio-emotional skills-experience more favorable labor market outcomes than those with lower levels of skills. Inlinewiththehighdemandforsocio-emotionalskillsofemployers,theanalysisshowsthatinUkraine,peoplewhoarecreative,proactive,perseverant,responsible,adaptable,andemotionallystablearerewardedwithhigherwages,higheroccupationalstatus,ormoreactiveparticipationinthelabormarket.Basiccognitiveskills,conversely,donotappeartobesignificantlyassociatedwiththeseoutcomes.Aplausibleexplanationisthatonaverageahighleveloffoundationalcognitiveskills,providedbythecurrenteducationsystem,isfairlyhomogeneousacrosstheurbanpopula-tioninUkraineandthuslikelytobetakenforgrantedbyemployers.

The relative importance of cognitive and socio-emotional skills, and of other factors, varies across age groups and types of occupations. Skills,especiallysocio-emotional,explainmorewagedifferenceforyouthbetween15and30yearsandolderworkers(45–64years)thanmiddle-ageworkers(30–44years)(Figure4).Socio-emotionalskillsforolderworkersareassociatedwiththelargestwagevariation,inparticularforgrit(perseverance)andopennesstoexperience.Toputtherelativeimportanceofskillsinperspective,observablefactorsotherthanskillsexplainalargerportionofwagevariations;suchfactorsincludedemographic,jobfunction,andlocationcharacteristics.Forexample,workexperiencemattersgreatlyforyouthandgender is largelyassociatedwithwagedifferencesformiddle-ageadults,reflectingthedisproportionaterepresen-tationofwomeninlow-paidsectors(suchaseducation,healthcare,retailtrade,orindividualservices).

10

Figure 4. Factors Associated with the Variation in Wages, by Age Group and OccupationProportion of the explained variance in hourly wage explained by cognitive and socio-emotional skills, experience, and demo-

graphic factors (urban Ukraine, 2012)

Gender Family backgroundLiving or not in KyivPotential work experience Socio-emotional skillsCognitive skills

Total0

5

10

15

20

25

30

35

%

Youth (15-29)

Adults (30-44)

Older (45-64)

Low- and medium-skilled occupation

High-skilled occupations

Source: ULMS-STEP Household Survey 2012.

Note: Results obtained using a Fields’ regression-based decomposition of the log of hourly wages (Fields 2003). The

height of each bar represents the total variation of wages explained by the data used for that regression (coefficient of

determination, R2). The subcomponents of each bar show the contribution of each factor to the total wage variation.

Family background refers to mother’s education and main language spoken at home (Ukrainian, Russian, both, or either);

potential work experience is the difference between the age and the approximate age at the end of one’s studies (it also

includes a squared term). Cognitive skills refers to reading proficiency; socio-emotional skills refers to openness to ex-

perience, conscientiousness, extraversion, agreeableness, emotional stability, grit, hostile attribution bias, and decision

making.

Changing Conventional Learning to Include Socio-emotional Skills

Socio-emotional skills, which are highly demanded by employers and rewarded by better labor out-comes, are often lacking from formal education or training programs but should be part of a compre-hensive skill development strategy. InUkraine,likeinothercountries,studiesshowthatindividualswithhigherlevelsofsocio-emotionalskillsaremoresuccessfulinschoolandatwork,inadditiontobetterhealthandothersocialoutcomes.Socio-emotionalskillsarenotasubstituteforcognitiveortechnicalskillsbutactasapedestaltolearnbetter,strive,andachievelabormarketsuccess.So-cio-emotionalskillsarebynaturemalleableandthereforecanbefosteredthroughinterventions.Yet,theseskillsaregenerallynotexplicitlytaughtatschoolorinjobtraininginUkraine.ImprovingtheeducationalandtrainingsysteminUkrainerequirestoreexaminewhichskillsmatter,inwhatcombination,andhowandwhenbesttoformthem.

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What are the key socio-emotional skills that matter for labor market success in Ukraine? Acore setof socio-emotional skillsemerges fromtheanalysisof jobvacanciesandhouseholdandfirmskillssurveys.Successfulworkersandthoseindemanddemonstratesocio-emotionalskills that help manage one’s emotions and behaviors (like control, resilience, ethics), goalsettingandwillingness to learn(achievementmotivation),andability toworkwithothers(teamwork).Eachoftheseskillscomprisesfacetsandcanbeacquiredandreinforcedduringoptimalageperiodsthataredetailedinthebodyofthereport.Althoughdatasourcesoftenmeasuredifferentfacetsofskillsorusecompetingterms,skillscanbemappedacrossdifferenttaxonomies,focusedeitheronbroadpersonalitytraitsormorespecificbehaviors(Table3).

Table 3. Demanded Socio-emotional Skills in Ukraine According to Various Taxonomies

Socio-emotional skills de-manded by firms

Equivalent in the PRACTICE taxonomy of labor-mar-

ket-oriented skills

Associated Big-Five person-ality traits

Professionalbehavior ControlandEthics Conscientiousness

Self-management Control Conscientiousness

Stressresistanceandperse-verance

ResilienceConscientiousness(grit),

emotionalstability

Goalorientationandmotiva-tiontolearn

AchievementMotivationConscientiousness(grit),

opennesstoexperience

Teamwork Teamwork Extraversion,agreeableness

Leadership InitiativeConscientiousness,openness

toexperience

Sources: Authors’ elaboration based on Guerra et al. (2014) and findings from Ukraine STEP Employer Survey (2014) and

Head Hunter job vacancy dataset (2015).

Note:‘PRACTICE’ refers to a taxonomy of labor-market-oriented skills, elaborated by Guerra et al. (2014), which includes

the following skills: problem-solving, resilience, achievement motivation, control, teamwork, initiative, confidence, and ethics.

Rethinking Post-secondary Education and Training Institutions to Build Skills

Education is the most fertile ground to build skills, but the current system lacks flexibility, qual-ity standards, and relevance for today’s labor market needs.Sixoutoftenfirmsfromfourkeysectorsregretthatformaleducationinstitutions,bothgeneraleducationandvocational,donottrainstudentstohavetheskillsthatemployersneed(Figure5).Inparticular,mostemployersconsiderthattheeducationsystemdoesnotproduceenoughpeoplewithpracticalskills,therightkindorlevelofskills,orup-to-dateknowledge.Employersalsolamenttheschoolsdonotteachgoodattitudeandself-discipline.

12

Figure 5. Firms’ Opinions about the Education System in Four Key Sectors (%), 2014

General education TVET

0 10 20 30 40 50 60 70 80

Practical skills

The KINDS of skillsneeded by employers

The LEVEL of skillsneeded by employers

Good attitudeand self-discipline

Does not meet the skill needsof employers

Up-to-date knowledge

Doe

s no

t pr

oduc

e en

ough

peo

ple

wit

h…

Source: Ukraine STEP Employer Survey 2014.

Note: The four sectors surveyed include agribusiness food growers, agribusiness food processors, renewable energy, and ICT.

While some foundations of performing education systems are in place in Ukraine, post-sec-ondary education and training systems have not been producing skills that are relevant for a changing labor market.Mostadultsachieveatleastuppersecondaryeducationandalmosthalfhavetertiaryeducationdiplomas.3Ukrainealsodoeswellininternationalstudentassessmentssuch as Trends in International Mathematics and Science Study (TIMSS), ranking in thesamegroupashigh-incomecountrieslikeItaly,Norway,orSweden.However,beyondcreden-tialsandstudents’basicacademicskills,therearequestionsabouttherelevanceofthework-ers’educationreceivedbeforethetransition,oftenvocational,andmoregenerallyabouttheappropriatetimefortrackingstudentsinnarrowTechnicalVocationalEducationandTrain-ing(TVET)schools.Overtheyears,thesupplyofuniversitygraduateshasincreasedbutirre-spectiveofrealproductionneeds.Moreover,employersknowthatthesedegreesareobtainedeitherfromschoolsanduniversitiesthatdonotproperlytrainstudentsorprovidediplomaswithout ensuring skills are acquired, thus making it difficult for employers to discern skilllevelssolelybasedontheeducationleveloftheperson.Thereisalsoagrowingrecognitionofincreasingimbalancesbetweenthetechnicaltrainingofworkersandtheactualfast-changingdemandsofthelabormarket.

3 By 2012, 92 percent of the working-age population between 25 and 55 years had attained at least upper secondary schooling, with an aver-age of 47 percent having attained tertiary education.

13

There are common skills or competencies in the high-, medium-, and low-skilled catego-ries that are expected by employers to be taught by the education system for a worker to be employable.Forexample,engineers, in thehigher-skilledcategories,areexpectedtohavephysics, complex problem-solving, active listening, design, and monitoring skills. On theother hand, manual workers in the manufacturing sector are expected to have coordina-tion,equipment-handling,andreceptivenessskills.Fortunately,manyoftheseskillscanbetaught invocationaltrainingsystems,as longastheequipmentthat isused isup-to-datewithwhatfirmsuse.

While some training and education is demand-led, curricula formation remains a top-down process, and the private sector’s engagement with the broader training and formal education sys-tem remains limited. The lack of interaction with the formal education system exacerbatesskillmismatches.Thistop-downprocessmeansthatalargesegmentofpeoplearetrainedandeducatedincurriculathatisnotindemand,creatingasurplusofunneededskills.Whilefirmsalsoseektopartnerwitheducationinstitutionstoprovideinputstotheircurricula,lessthanaquarterofallfirmssurveyedactuallyhaveregularcontactwitheducationortraininginsti-tutions.

Although the government of Ukraine defined strategies to boost school quality and relevance, the implementation of these plans and strategies has been constrained by the lack of financial resources and ad hoc coordination of stakeholders involved. Fundingforvocationaltrainingisnotbasedonexplicitcriteriawithperformanceindicators.Also,coordinationisdifficultbe-tweenthedifferentgovernmentagencies(includingtheMinistryofEducationandScience,MinistryofSocialPolicy,MinistryofEconomicDevelopmentandTrade,andStateEmploy-mentService)andnongovernmentactors(includingvariousemployers’associations,businessunions,chambersofcongress, tradeunions,andspecializednongovernmentalorganizations[NGOs]).

Many formal post-secondary education and training institutions need to be reformed to improve their strategic framework, system oversight, and service delivery. An assessment ofUkraine’s post-secondary education institutions indicates that the workforce developmentsystemhasclearstructuralissuesandscoreslowcomparedtointernalstandards:4Educationandtraininginstitutionslackcleardirectionforpolicyelaborationandimplementationasthefragmentationof responsibilitiesundermine theability todevelopacommonvision,devisepolicy, and coordinate with employers. In addition, the funding system is inefficient in thewayitallocatesresources,whichaffectstheprovisionoftextbooksandtheabilitytoupgradeobsolete infrastructureandequipmentofvocational schools (Figure6).Within the servicedeliverydimension,Ukrainescores relativelywellwithregardtoexcellence,which isa re-sultofhavinghigherdiversityofnon-stateprovidersactiveinthetrainingmarket.However,theperformanceofUkrainianeducationinstitutionsareweakerinotherdimensionssuchaslimitedreliable informationoncurrentandemergingskillsdemands tokeeptheirprogramofferingsrelevanttolabormarketconditions,andfeeblesystemsofmonitoringandevaluationofservicedelivery.

4 The assessment is based on the Bank research tool Systems Approach for Better Education Results (SABER), which is designed to provide systematic documentation and assessment of workforce development (WfD) policies and institutions. The tool assesses three overarching dimen-sions—strategic framework, system oversight, and service delivery—using a scoring system from one to four. A score of one means there are limited levels of development and organization and four means the WfD system is advanced and sets world standards of good practice. Overall, Ukraine’s WfD is between two and three, which corresponds to a system that is in an emerging level of development, with some established features.

14

Figure 6. Assessment of Ukraine’s Post-secondary Education and Training Institutions

Direction

Dimension Policy Goal

Demand-led 2,2

Coordination

Funding

Standards 2,2

Pathways

Excellence

Relevance 2,5

Accountability

1 2 3 4

Str

ateg

icF

ram

ewor

kS

yste

mO

vers

ight

Ser

vice

Del

iver

y

Source: World Bank SABER-WfD Data Collection Instrument 2013.

Stringent Labor Regulations Hinder the Allocation of Workers’ Skills

Employers see payroll taxes and social security contributions as major constraints to their op-eration and growth.Theoverwhelmingmajorityoffirmsinfourkeysurveyedsectorsfacediffi-cultiesintheiroperationandgrowthduetoproblemsrelatedtohiring,employing,andfiringworkers(Figure7).Inparticular,theyareaffectedbyhighpayrolltaxes,socialsecuritycontri-butions,andwageconstraints(highoverallandminimumwage).Moreover,analreadyhightaxwedgeonlaborhasincreasedduringthelastyearduetotwomajorchangesinlabortaxation.Additionaltaxesformilitaryexpenditureshavebeentemporarilyimposedonpersonalincome,andthetaxrateformonthlysalariesexceeding10minimumsalaries–UAH12,180–hasbeenraisedfrom17to20percent.Thesetwohaveincreasedtaxwedgesbyatleast1percentagepointoverayear.

15

Figure 7. Firms Reporting Labor-related Problems as Major or Severe Constraints (%)

0

10

20

30

40

50

60

70

80

Agribusiness growers Agribusiness food processors Renewable energy IT

Payrolltaxes andsocialsecuritycontribu-tions

Overallwagelevel

Findingworkerswithexperience

Minimumwage

Workers'TVET

Workers'generaleducation

Laboravaila-bility

Employ-mentprotectionlegislation/Labor code

High jobturnover

Source: Ukraine STEP Employer Survey 2014.

Such high labor taxation and burdensome labor regulation rigidities have prompted employers to find ways to evade strict labor regulations through informality, which is possible because of the lax enforcement of such laws.Increasedevasionhasresultedinariseinfirmandlaborinformalitysincethefirstwaveoftheeconomicandfinancialcrisisin2008.Workersunderinformalcon-tractsarelesslikelytobeofferedtrainingorbenefitswhichallowthemtoaccesstraining.Suchanincreaseddeformalizationofthelabormarketunderminesthegovernment’sgoalofmakingtheeconomymoreproductiveandmorecompetitive.

As firms are affected, so is job creation in the formal sector, prompting the Ukrainian govern-ment to introduce further labor regulations. Some changes aimed to decrease the unified social con-tribution (USC) rate imposed on employers and others aimed to improve access to work for special groups.InthecaseoftheUSC,theinitiativewasputinplacetoformalizelaborincomeandin-creaserevenuestopensionandothersocialsecurityfundsthroughtheexpandedtaxbase.Whileaquotaof5percentappliedtofirmstohirespecialgroups(pre-retiredpeople,youngspecial-ists,unemployed,disabled,andsingleparents)wasimplementedintheearly1990stoeasetheaccesstoworkforthesegroups,the2013laweffectivelyenvisagedreimbursementofUSCforjobplacementoftheunemployedfromthesedisadvantagedgroups(inadditiontothe5percentquotameasure).Therewerealsoamendmentstoregulatepaidinternships,limitdiscrimination,andhelpmobilizeworkersintothemilitary.

Looking at key amendments made to the labor code during the past five years, it is clear that in many cases changes have made labor relations more restrictive and employee-focused. Theremaininglaborcodedoesnotprovideregulatoryfoundationsforanadaptableflexi-blelabormarketorconditionsconduciveforcreationofmoreandbetterjobs.Itcontinues

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tolackincentivesforfirmstoincreaseformalemploymentbyfailingtoreducerelativelyhighlaborcostsandfailstoincludecontractingarrangementsthathelpemployersnavi-gatetop-downbusinesscycles.Instead,ithasaddednewfines,penalties,andrestrictions.This makes the skill gap issue and its negative impact on development of the firms andtheeconomyevenmoreacuteasemployersworkingintheformalsectorprefernottohireworkersatall.

The efficiency of labor regulations reform would depend greatly on constraining economic and political factors.Althoughtheseverityoftheconstraintsvariesslightlyacrosssectors,mostem-ployersreportthateconomicandfinancialuncertainty,politicalinstability,excessivetaxes,cor-ruption,andcrime(allofwhichactasaddedcosts)aremoreofadirecthindrancethanskill-re-latedlimitations(Figure7).EmployersalsojudgethatcapitalconstraintsandcompetitionfromtheinformalsectormakeitverydifficultformanyUkrainianfirmstocompetefavorablydomes-ticallyandinternationally.

Figure 8. Non-labor Market Issues that Constrain Firm Efficiency (%), 2014

Agribusiness growers Agribusiness food processors Renewable energy IT

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Source: Ukraine STEP Employer Survey 2014.

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A Policy Agenda for Supporting Workers in Acquiring and Using Skills for the Modern Workplace

An integrated skills development strategy for employment and productivity in Ukraineshouldconsiderthreepolicypillars:

• Build foundational skills for new labor market entrants. Foundationalskills—that isa solid base in cognitive and socio-emotional skills—are imparted largely in early childhood,primary,andlower-secondaryeducation,andplayacriticalroleintheeventualqualityoftheworkforce.Futureworkersneed toacquiregood foundational skills to learnbetter, thriveatschoolandthelabormarket,andgainmoreadvancedskills(includingtechnicalskills),andbeadaptabletorapidlychanginglabormarketneeds.

• Enhance the quality of higher education and employment institutions to build advanced skills of the current working-age population and future workers. Thisentailsimprovingtherele-vanceofhighereducationandtrainingprograms(likedevelopingfeedbackmechanismsbetweentheeducation-traininginstitutionsandfirms),settingupincentivestoextendthecoverageoftrainingprograms,anddevelopingalabormarketinformationsystemforinformeddecisionmaking.

• Improve the institutional environment to ease the use of current workforce’s skills. Therearecritical institutional factors that facilitateorhinderemploymentand jobcreation.Theseincludeaninstitutionalenvironmentthatenablesmorehiring,betterjob-matching,andfacilitatingworkerinternationalmobility.

Pillar 1 – Building foundational skills for new labor market entrants

The formation of socio-emotional and cognitive skills is a multistage process affected by envi-ronment and investments. Skillsformationisacumulativeprocessandinterventionshavetobeimplementedasanintegratedsetacrossone’s life.Thefamilialenvironment(thehousehold’sliving standards, parents’ education, and relationships within the family) and home learningenvironmentplayatremendouspartinshapingtheproductionofcognitiveandsocio-emotionalskills.Marketableskillsaredevelopedafterchildhoodthroughinformallearning,formalschool-ing,training,andon-the-joblearning.Nationalinstitutionssuchasthehealthcaresystemandtheschoolsystemaremajorcomponentsthatcanaltertheskillsofanindividual.Thebenefitsofaninvestmentdependonanindividual’sprevailinglevelofskills.

Interventions for socio-emotional learning must target optimal periods for the development of key skills, namely when individuals are biologically and socially ready. Primaryschool-agechild-hoodandadolescenceareoptimal(butnottheonly)periods—primaryschoolbecausethatiswhenchildrenfirstneedtointeractwithothersontheirown(parentslargelydoitwhenthekidsareyounger).Inadolescence,morecomplexsocialinteractionsemergeduetoneurobiologicalchanges,largerinfluenceofpeeracceptance,andsocialchangeswhichprovideopportunitiestodevelopmorecomplexpatternsofsocialproblemsolving.Theperiodbetween6and11yearsofageisoptimalforalldimensionsofsocio-emotionalskillsbutyoungerorolderagesarealsoop-timalacrossdimensions.Forexample,resilienceisbestdevelopedbetween0and11yearsofagewhileethicsisoptimallydevelopedbetween6and18yearsofage.

Socio-emotional skills can be fostered by a variety of interventions, characterized by specific objec-tives, targeting age period—preschool, school age, youth, and adult age—and places of implementation

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such as school, work, or centers. Mentoring,parenting,andhumaninteractionsaretheunifyingthemesof successful skilldevelopmentstrategiesacross theentire lifecycle.5 Earlychildhood interven-tions—likethosepromotingparent-childinteractions—offerthelargestreturnsandgreatlyinfluencelong-termoutcomes.Forschool-agechildren,arangeofcountrieshaveimplementedsystemwidereformstoincorporatesocio-emotionalskillsinlearningstandardsandcurriculum,trainingnotonlychildrenbutalsoteachersandschoolprincipals.Manyearlyormiddlechildhoodprogramsalsoaimtofostercognitiveskills.Foradolescents,mostpromisingprogramsintegrateaspectsofworkintotraditionaleducationand/orprovidementoring.Extracurricularandafter-schoolprogramsusingartsorsportstoteachsocio-emotionalskillsarealsovaluablealternativeapproaches.Socio-emotion-alskillscanalsobeincludedinjobtrainingprogramsinadditionaltotechnicaltraining,likeintheyouthtrainingprogramsimplementedinmanyLatinAmericancountries.Manyunknownsremainwithregardtotherightdoseoftrainingoftheseprograms,thesequencing,thefocusonsingleormultiplefacets,theirlong-termimpact,quality,designofmechanisms,andincentives.Theseconsid-erationsshouldbekeptinmindtodesigninterventionsandintegratethemintoexistingstructures.

Pillar 2 – Fostering advanced skills through better information and enhanced quality of tertiary education and labor training

Building a strong leadership structure and adopting performance-based financing are promising ways to improve the quality of the higher education. ToaligntheUkrainiansystemwithwell-man-agedworkforcedevelopmentsystemsaroundtheworld,itwillbecriticalforthegovernmenttofollowthroughinthefollowingfiveareas:(a)ahigh-levelleadershipcommitteetosetthestrategicplanandthevisionoftheworkforcedevelopmentsystem,toalignitspolicieswiththecountry’ssocio-economicgoals,andtoensurecoordinationamongstakeholders;(b)amoreeffectiveinsti-tutionalsetupforimplementationoftheNationalQualificationFramework(NQF);(c)regularevaluationoftheimpactandenhancementofexistingtrainingprogramsforallmodesofdeliverywithregardtograduates’labormarketoutcomes;(d)fundinglinkedtoenrollments,performance,andeffectivenessoftrainingprograms;and(e)fosteringcompetitionamongVocationEducationandTraining(VET)institutionstoenhancetheprovisionofqualityeducationalservices.

A major shift to improve the relevance of higher education is to establish steady links between schools and enterprises by setting up standards and adapting curricula. Toensuretotrainworkerswithskillsthataredemandedbyemployers,tertiaryeducationinstitutionsshouldsystematizepartnershipswithorganizationsinindustrytodevelopoccupationstandardsandadequatecur-riculaandregularlyreviewthem.Ideally,theidentificationandqualityreviewofoccupationandskillsstandardsfortheworkplacewouldbecoordinatedbyaspecialgovernmentbodydedicatedtothistask.Financialsupportandtechnicalassistancefromlocalandinternationalpartners,do-nors,andtheprivatesectorshouldbesoughttoensureproperimplementationandintegrationofthenewstandardsthroughouttheeducationandtrainingsystem.6Occupationstandardswouldhelptheprivatesectortoplayamoreactiveroleincurriculadesign.Asanexample,Chicago’scollegesystemwasfullyreformedtoalignitscurriculaandactivitieswiththeneedsofemploy-ers.Asoneofthemostimportantinstitutionsbeyondtheformaleducationsystemthatprovideopportunitiesforlifelonglearning,theStateEmploymentServicesofUkraineshouldalsotietrainingandretrainingtolocallabordemandsmoreclosely,whichisnotcurrentlythecase.

5 See Heckman and Mosso (2014) and Kautzet al. (2014) for reviews of interventions fostering skills over the life cycle. 6 International experience, from various countries that have undergone similar reforms or lead in this area (such as Australia, Ireland, United Kingdom, Korea, and Malaysia), should be assessed..

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Financial incentives for firms should be considered to promote on-the-job training, an effective way for workers and labor market newcomers to build advanced skills. On-the-jobtrainingcantakevariousformssuchastrainingforpermanentemployeesoropportunitiesforapprentice-ships,internships,andfellowshipsfornewworkerstoprovideearlysectorworkplaceexperienc-es.Anemployertraininginvestmentprogramthatassistsinterestedbusinessesintrainingtheiremployeescouldbetargetedatcompanies lookingtoexpand,hopingtorelocateto favorablegeographicareas,orinjeopardyofclosing.Programparticipationshouldbemadecontingentoncriteriathataddressproductivityconcerns(suchashavingclearjobcreation/retentiongoals)and have fund-matching mechanisms to prevent abuse. With respect to off-the-job training,short-termworkschemescanretrainparticipantstobebetterqualifiedforoccupationsavailableintheirlocallabormarket.7TheStateEmploymentServicesofUkrainecouldactasabridgebe-tweenfirmsorjobseekersandtrainingprovidersbycoordinatingthedesignoftraining,sharingequipment, establishing teacher-practitioner arrangements, among others. Whatever the set-ting,thetrainingprogramshouldbecarefullymonitoredandevaluatedtoensuretheirquality.

A better information system on the labor market is essential to facilitate fruitful investments in skills formation and identifying the demand for skills. Students,theirfamilies,andjobseekersshouldhaveaccesstoreliable informationonlabormarketprospectsacrosshighereducationfields and institutions and job requirements. Career and labor market information that helpinterveneearly in thedecisionmakingcanpreventmisalignments later.Outreacheffortsarecriticalandcould includeonline introductiontoeducationandtrainingprograms,classroomspeakers,firm/planttours,andshadowingexperienceswhileinschool.Alabormarketinforma-tionplatformshouldalsocontainup-to-dateinformationonskillsandoccupationsindemandforworkersandeducatorsandtrainingproviders:8onjobvacancies,theirrequirements(forin-stancewithregardtoexperience,education,orskills),wageinformationinthesectorandoccu-pancy(bypersonalandgeographiccharacteristics),amongotherrelevantdimensions.

Pillar 3 – Improve the institutional environment to ease the use of current workforce’s skills

A strategy to increase the use of people’s skills to encourage job creation through labor regulation reforms while ensuring workers benefit from sufficient social protection.IntheEasternEuropeandCentralAsiare-gion,Ukrainehasthehighesttaxwedge–thedifferencebetweenthetotalcostoflaborforanemployerandthetake-homethattheworkerreceives.ThegovernmentofUkraineshouldevaluatetheeffective-nessofsocialsecuritycontributiontaxrefundscurrentlyinplace(since2013)andwherelaborcostscanbefurtherreduced,forlonger-termmeasures9.Morecontractualdiversitywouldalsobealeverforjobcreationbyeasingtherecoursetotemporaryformsofemployment,increasingthelengthandscopeoftermcontracts,andallowingflexibleworkinghours.However,contractdiversityandreducedlaborcostshouldnotcomeattheexpenseofworkers’protectionincaseofjobloss,meaningthatthegovernmentshouldshiftfromtheprotectionofjobstoprotectionofworkersbyprovidingsupportduringperiodsoftransitionfromonejobtoanother(amodelcalledmodelof‘flexicurity’).Supportcanbeprovidedeitherthroughincome(unemploymentinsurance)oractivelabormarketprogramslikeretraining.

7 Short-term work schemes are not uncommon in Ukraine but their take-up rate can be increased by not only tying the work activities suited to the education level of the participants (for example, less manual and more intellectual in nature) but also tying the program to occupational re-training which responds to the demands of the local labor market. 8A methodology tested in this report provides an example of collection of job vacancies and identification of job requirements. This exercise could be pursued and continuously updated by the State Employment Service in partnerships with the local private sector. 9For a detailed review of policy options to reduce labor costs, see Kuddo (2011)

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Promoting the best use of skills also requires efficient intermediation between job seekers and jobs.Efficientlaborintermediationservicesrelyoncomprehensiveinformationaboutlabordemand,asem-phasizedintheagendaforpillar2,butalsorequiretoaddressthefullrangeofconstraintsfacedbyaheterogeneousvulnerablepopulationinthelabormarket(forexample,long-termunemployed,youth,informalworkers).Inthisspirit,theStateEmploymentServicecouldimproveitsservicesindevelop-ingandusingastatisticalprofilingtool,whichcanalsobeusedtolinkindividualstoshort-termandlong-termsocialassistanceforthosethatarelessabletowork.Suchatoolcanhelpavoidduplicationintheprovisionofservicesand,intheconflictcontext,canhelpintheintegrationofIDPbyregisteringandprovidingthemwithlaborandsocialservicesandalsoassistancewithafocusonactivation.

Removing the barriers to internal migration would allow workers to find more job opportunities and make full use of their skills. Ukraine’slowinternalmobilityperinternationalstandardsismainlyduetothereg-ulatoryframework.Ensuringtheportabilityofsocialbenefitsacrossregionandremovingadministrativeproceduresthatrequirepeopletobeofficiallyregisteredattheirplaceofresidence,althoughmanypeopleprefernottoregisteranewresidenceforvariousreasons,wouldsupportinternalmigrationofworkers.

Figure 9.Overview of the Proposed Priorities and Corresponding Actions

InstitutionalEnvironment

Reform

Institutionalize a system that allows providers of education, training, and lifelong learning to identify the skills in demand and to integrate them into sector program curriculaReform labor regulations to reduce labor costs which disincentivize training and job creation

Education & Training Institutional Reform

Validate and align education and training curricula with sector employment needs and industry credentialsImprove the strategic orientation and oversight of the workforce develop-ment systemProvide early career awareness opportunities starting in secondary school, continuing through vocational and university education in partnership with local industry

Firm LevelIncentives

Create systemic partnerships between employers and education and training (formal and informal) institutionsOffer incentives for on-the-job and off-the-job training and opportuni-ties for apprenticeships, internships, and fellowships to provide early sector workplace experiencesEvaluate and enhance social security contribution tax refunds to promote job creation and investments in worker skills

IndividualLevel Assistance

Improve the effectiveness of public employment and training services to facilitate access to jobs and to lifelong learning and upskilling opportunities for all workersImprove the functioning of employment and training assistance programs to help vulnerable populations (namely IDPs and long-term unemployed) obtain skills relevant to the labor market and to stay economically activeProvide financial incentives for upskilling and continous training

Source: Authors’ illustration.