Acquiring Skills: : Market Failures, their Symptoms and Policy Responses

Citation

Hudson, J. (1998), "Acquiring Skills: : Market Failures, their Symptoms and Policy Responses", International Journal of Manpower, Vol. 19 No. 3, pp. 197-200. https://doi.org/10.1108/ijm.1998.19.3.197.2

I am always suspicious of books of readings. An easy opportunity for a publication, to offload that paper which no journal is perceptive enough to take, resulting in a mish‐mash of somewhat repetitive papers barely held together by a coherent theme. This offering appears, however, to avoid the worse excesses of the genre, and many of the chapters demonstrate a high level of technical sophistication but it never quite graduates to the status of “a must” for those in the area. That the book is a lot more coherent than is often the case, is perhaps a reflection of the skills of the two editors. That the volume compels more attention than is frequently the case is a reflection of the distinction of the contributors. But despite this the book fails to convince, at least me, and I am forced to the conclusion that whilst proving a useful source, particularly for graduate students, as a description of current thinking in this area it will not significantly add to this current thinking.

The book, which stems from a conference, is divided into three sections. The first is mostly theoretical and looks at the reasons for skill shortages. Margaret Stevens makes the case, central to the whole theme of the book, that because virtually no training is useful to all firms in the economy, but rather to a limited number of firms, they will be imperfect competitors for labour. The opposite point is then made that because skills are in general not totally firm specific there is the possibility that other firms can poach trained workers, thus reducing the benefits to training from an employer’s viewpoint. Two of the remaining four papers in this section, by David, Ulph and Snower, essentially tell the same story, but gift wrap it slightly differently. The theme of two mathematically sophisticated papers, is of the vicious circle in which few skilled jobs are available because firms cannot find the skilled labour to fill those jobs, but because of the lack of skilled opportunities there is little incentive for skill acquisition by workers.

The second section looks at the empirical consequences of skill shortages. Machin makes the (somewhat obvious’?) point that skill acquisition is becoming more important because of a shift in the structure of the labour market in both the US and the UK towards skilled occupations. Haskel and Martin find that skill shortages in the UK reduced productivity growth by some 0.4 per cent p.a. in the UK during the 1980s. Mason, van Ark and Wagner claim to find evidence, in a detailed study based on biscuit processing, of the “low‐skill, bad‐job trap” referred to in earlier chapters. Thus, for example, value added per employee hour was 40 per cent higher in Germany than in Britain. The problem with these studies, and it is a problem which underlies the whole book is one of causality. Let us suppose that Germany was more efficient than the UK due to geographical factors which gave it a productivity edge. In order to exploit this German firms invest more in physical capital which in turn calls for greater investment in human capital. The latter does not cause the greater productivity in Germany, it is a consequence of it. By itself investing more in human capital in the UK would be a waste as the workforce would then be too educated for the jobs they will fill and in that case emigration will be the likely consequence, with the UK effectively training workers for other countries.

The third and final section begins with Finegold arguing, within the context of British education and training, that governments can also fail in their attempts to rectify market failures. Booth and Satchell look at the apprentice system in Britain in the 1970s arguing that it acted as a device to allow firms to recoup some of the costs of training. Keep and Mayhew argue that the problem is not a lack of supply of skilled labour, but a lack of demand through managers who rely on low costs to sell their products. Finally, the book ends with a concluding chapter by Snower and Booth which attempts to suggest a policy prescription but, being the kitchen sink approach to policy making ‐ include everything possible in the hope that something may be of relevance ‐ effectively fails. Thus, in the end both this final chapter and the book itself fail to convince, firstly that there is a skills problem, at least in the simple terms found in much of the book, and second that if there is one how to proceed in solving it.

The book does show that the market for skills is an imperfect one. But the whole economy is riddled with imperfections and as the theory of the second best has for may years told us, reducing imperfections in one area may not move the economy towards a first best solution. The general theme of the book is that there is too little training, particularly in the UK, and this results in efficiency losses. The solution is to somehow increase training and skill acquisition. Keep and Mayhew highlight the flaw in this argument. If the problem lies elsewhere in the economy in leading to employers seeking to follow a low‐cost route to economic growth then the economy will not need nor be able to effectively use a more skilled workforce. Hence, to train up the workforce, although it will bring some benefits will not justify, the cost expended. Thus before one should embark on a program of skill acquisition it should be ascertained what level is required by industry. If then this is felt to be too low the appropriate policy reaction would be to attempt to change the maximisation problem facing firms so that they no longer choose the low‐cost route, whilst simultaneously adding to the pool of skilled labour. Creating a pool of high‐quality labour is unlikely, by itself, to be sufficient to be able to achieve this, but may be a necessary part of a comprehensive restructuring plan. In this respect the emphasis Cyprus has always placed on education, with the third highest proportion in the world of its population going into higher education, has proved a key factor in the dramatic development of the island’s economy since the mid 1970s. But attracting offshore companies to the island and the development of the tourist industry provided the demand for the skilled labour and without this demand there would have been a lot of very educated olive pickers. The two interact like the two blades of a pair of scissors. To hone the one blade, whilst leaving the other blunt will not give an efficient pair of scissors. Incidentally, this emphasis on education is inbuilt in the Greek Cypriots, as with the Hong Kong Chinese. It is a “mind set” which values education and training at all levels of the population in a way which is, perhaps, not the case so much in the UK.

Three final observations having seen the impact of HEFCE on quality standards in the higher education system and also the workings of GNVQs in further education colleges, I am convinced that government formal intervention is beset with problems Such intervention certainly drives up the lower quality bound of educational provision, but at the cost of driving down the upper bound. Innovation and initiative are frowned upon, the unconventional distrusted, as a result we produce a conveyor belt of the competent rather than the variety of the past including the odd flawed genius which is I believe, so important to a dynamic economy. Thus, if government is to act in this area it seems to me that it should do so by changing the system of market incentives rather than by trying to regulate or control that market. For example, if firms do not recoup the costs of training the Government might attempt to mitigate this deficiency. In many ways it seems a pity that the old system of apprenticeship has disappeared. A form of this does appear to work well on the continent and taught my father skills no current toolmaker has at his fingertips. At the time seven years appeared to be a long time, but in retrospect this may merely have been an effective device to allow firms to subsidise training, whilst the worker would recoup the gains of training at a later stage. Finally, the British economy is now to a large degree an outpost for multinationals from around the world seeking a low‐cost manufacturing/commercial base in the European Union. Each of these firms brings something of its own culture to bear to its UK operations. This may have a widespread impact on British training practices in the coming years, but whether these companies will want a highly educated workforce as opposed to one skilled in certain specific and restrictive areas, is another question. The inward investment explosion of the last 15 years may have locked the UK into a low‐wage economy well into the next century.