New
Perspectives for Learning - Briefing Paper 37
Shifting skills and wages
Context of the Research
The
distribution of skills and wages in the workforce is changing across developed
countries with virtually every advanced country experiencing a significant
increase in the proportion of employment for skilled workers and a decrease in
the share of employment for unskilled workers. Countries like the USA and UK
have experienced an increase in wage inequality, whilst other European
countries and Japan have not, although their unemployment level has risen,
especially amongst the less skilled.
Skilled
biased technical change, globalisation and the associated enhanced competition
from low wage countries have been competing explanations for these changes,
yet far less attention has been paid to the processes affecting the supply of
skills. Although skill biased technical change may help explain why all
countries have seen a shift in the composition of employment, it cannot
explain why, if all countries have been subject to common technological
shocks, the change in the pattern of wages has been so varied across different
countries.
An analysis of the supply of skills is
necessary for a coherent explanation of these observed changes. The project
brought together the expertise of a number of European economists from diverse
methodological backgrounds to better understand the mechanisms underlying the
changing distribution of earnings and processes, driving technical progress
and skill accumulation.
Key Conclusions
The following conclusions were drawn
from the project: -
- Substantial differences in terms of earnings and
unemployment patterns of inequality were found across the US, UK, Germany,
France, Italy and Greece, suggesting that idiosyncratic features of each
country’s educational and labour market institutions have had a major
effect in shaping the effects of technical progress and increasing the
supply of skilled labour.
- The
increased demand for a better-qualified workforce is highly responsive to
the existing supply of skills.
- Such
an increase in demand appears to require a number of simultaneous
organisational changes that allow firms to exploit the synergies between
human capital and new technologies. The intensity of training can also be
associated to these types of changes.
- Most
of these changes are found in the service sector and very specific
industries within the manufacturing sector.
- There
is strong evidence that organisational change; technology and human
capital are complementary assets of the modern enterprise.
- There
are increasing incentives for firms to either train their workers and/or
demand an apprenticeship scheme.
- In
addition, firms benefit from hiring apprentices in terms of their pure
current productivity, as in France and Germany where apprentices were able
to substantially contribute to the productivity of the firm where they
were training. This is particularly relevant for small firms.
- Apprenticeships
also have investment value for firms as the trainees learn firm-specific
skills and offer privileged information about the trainee’s
productivity.
- The
decision to stay on in education after the compulsory schooling age is
highly influenced by current labour market conditions, particularly
unemployment.
- Also,
individuals appear to be responsive to the existing wage premium, which in
the case of countries with short higher education courses is a good
approximation to their own expected wage premium. This responsiveness is
also shaped by the direct cost of additional education i.e. tuition fees
and availability of student loans. In this context, the human capital
investment incentives model explained UK data.
- It
is convenient to target separately research & development activities
that are new to the market (new marketable products) and are new to the
firm (implementing new processes).
- A
trade induced skill bias, although thought to have no significant effects,
assumes contradictory features of international trade, i.e. most trade
involves intermediate products within and not between industries. Evidence
from France indicates that although the trade induced skill bias does not
completely explain changes in unemployment and earnings, its effect is far
from negligible.
- A
decrease in the educational standards required to enter higher education
may lead to a higher degree of crowding out in the labour market for less
skilled workers. Therefore credit-constrained individuals need targeting
first when subsidising access to higher levels of education.
Over-education at an individual level can also be consistent with a
socially sub-optimal level of educational attainment.
- The
links between research & development/growth, skill/inequality and
training within different firms and different economies can be explored
using a simple model developed during the project.
- Unions
help wage compression by discouraging independent investment in human
capital and encouraging firm-sponsored training. Therefore a period in
which economic growth rates accelerate might lead to a reduction in the
unionisation rates and thus increase inequality.
- Minimum
wages can lead to an overall improvement in the quality of jobs offered by
firms without leading to a significant unemployment increase.
- Publicly
supported apprenticeship schemes can contribute to improved market
efficiency. However, the beneficial effect of these policies must be
traded off against their opportunity cost and the distortions they might
generate in other sectors of the economy.
- There
are numerous possibilities for research that examine recent policy changes
and evaluate simultaneously the associated costs and benefits.
Key Recommendations
- Restrictions on the free flow of information
regarding quality of skills and job’s productivity, effort, etc. across
participants in the labour market can lead to market failures. However,
successful government intervention and institution design could lead the
economy to the most preferable equilibrium.
- Education/skills and training at a micro-level
results in a more educated person needing less training, but at the macro
level policies that generate a higher proportion of educated people can
increase the amount of training that takes place by making the economy
more innovative and raising the demand for training.
- Policies targeted directly at raising the rate of
return to research and development have the strongest effect on growth,
but at the cost of increasing inequality.
- Policies that lower training costs across the board
will have an ambiguous effect on growth and could have a mild positive or
negative effect, but seem to have little effect on inequality.
- Policies that differentially reduce the training
costs of the least skilled have little effect on growth and a small effect
on reducing inequality.
- Further research into comparative static predictions
is necessary with particular emphasis on the skill composition and
training of firm size and research and development, as there are very few
robust comparative static predictions.
Further Information
Full
title of study - “Growth, Inequality
And Training ” (December 2001)
Full
report, Abstract,
Summary,
Partner
details
Contact Person
Prof. David Ulph
University College London
Centre for Economic Learning and Social Evolution
Gower Street
London
WC1E 6BT
United Kingdom
Tel. 44 207 5045862
Fax. 44 207 9162775
Email: d.ulph@ucl.ac.uk
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Last updated
28 June 2007