Tuesday, March 26, 2013

Is High Labor Mobility Compatible With High Skills Development Over the Long Run?

Pure speculation on my part, I have no idea what the literature says. However, given perennial concerns about the lack of skilled workers in the United States and the shift away from long term employment towards shorter term employment terms I am often left wondering if there is a causal relationship to the two.

First, a brief explanation of what I mean by skilled labor. I don't have in mind educational attainment, incentives towards this are probably increased rather than decreased. Instead, I have in mind corporate sponsored training programs. These skills, and their transmission mechanism, would be particularly important for workers who lack educational credentials documenting their skills.

The transition I have in mind is from an environment where stronger employment contracts give employers large incentives to make the best of their current workforce and to invest in training where workers also find it difficult to change employers.

In this scenario, both employers and workers share in the costs and benefits of training programs leading to fairly high levels of skill training.

After a policy change, labor market reforms make labor more mobile. In the short term, this is great for both workers and employers. Workers are able to bargain for greater compensation because they can market the skills they have acquired to more employers. Employers benefit because they have a larger pool skilled workers rather than being restricted to those they can develop internally.

In the short term, everyone wins. Workers individualize the responsibility and benefit for their skills and employers can cut costs and attract a greater diversity of talent.

In the long run, however, the situation is more complex. Individual workers have far fewer opportunities to prove their long term worth to a company, instead they are expected to proactively develop marketable skills. This may be impossible in some industries, in many other industries their is a disconnect between an individual's potential and their current income needs and assets to develop this potential. They lack the access to credit and cashflow needed to really develop their ability.

Employers also end up losing out. They face far greater risks that other employers will poach their expensively trained workers, as more employers cut back on training expenses the wages of remaining skilled employees get bid up to astronomical levels; ultimately eroding much of the savings.

On net, we reach an equilibrium where high skilled employees are rare, costly, and risky to develop. Aggregate skill levels fall despite the increase in returns to skill because of the difficulty of individuals developing skills and experience relative to organizations. Incentives are stronger to recruit from outside, even outside national boundaries, than to train inside because the investment can to easily walk out the door (often despite non-compete agreements which favor employers over employees).

As I said, this is pure speculation. But I was musing on the subject and thought I'd share; perhaps someone can even point me to literature on this subject. But in the abstract this would explain why labor mobility would be associated with increased efficiency in the short term but long run macroeconomic problems. I'm suggesting a powerful cohort effect, individuals in the initial cohort gain substantially in their ability to internalize the benefits of their training and employers gain substantially in their ability to recruit from a deeper pool.

However, subsequent cohorts won't receive the same access to training their parents have. Their skills, controlling for other factors (like education policy), will decline relative to their parents. Employers, and associated economic growth, will also slow due to skills shortages. On net, this would be a policy outcome that would have deceptively good returns over the period normally covered by long run projections but which would, theoretically, have negative economic impacts outside of a 20 year window or so.

Any thoughts or suggestions for follow up reading?

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