B School for Public Policy
Investing in Human Capital: Who’s Responsible?
Seminar by Peter Cappelli
This seminar, presented by Peter Cappelli, examined various aspects of workforce development: why employer investments in worker training have declined, including the role that tax treatments have played; wage trends; and the value of higher education for the American worker. Some attention also will be given to assessing the effect of the Work Opportunity Tax Credit and other incentive programs.
There has been much discussion in recent years about a skills gap in the U.S., driven largely by employer complaints over filling jobs. The term “skills gap” can mean different things. Usually, it refers to a belief that there is something fundamentally lacking in the labor force. In the typical telling of the skills gap story, schools are failing to educate students effectively and are graduating students who do not have the skills employers need, thus creating a basic skills shortfall in the labor force as a whole. Others who talk about a skills gap really are referring to a skills shortage, meaning that at the current market price for labor, employers cannot hire the people they are looking for. The third sense of a gap entails a skills mismatch, and describes parts of the U.S.—for instance, North Dakota, when energy production there skyrocketed—where labor demand is booming but where people in the region do not have matching job skills. A skills gap, skills shortage, and skills mismatch are all different and theoretically could be going on all at once.
Overall, though, the available evidence on the U.S. economy does not support the idea that there are serious skill gaps or shortages, and when there are skills mismatches, they often involve workers who are more educated than their job responsibilities require.
Why is the skills gap an issue now?
Research suggests that job skill requirements actually have not changed much over the past 20-30 years. What has changed is the rise of what one might call the “plug-and-play” labor force. Prior to the mid-1980s, when someone lost their job due to an economic downturn, often they eventually would be recalled into that same job when the economy improved. Job retainment in the U.S. was about the same as it was in Japan; people stayed with the same employer for a very long time.
But this began to change in the early 1980’s. Companies started hiring new people rather than hiring the people they previously let go. Before 1980, 90% of job openings were filled internally through promotions, relocations, lateral hires, and job rotation assignments. Just 10% of hires were from the outside, typically entry level jobs. Today, the data indicate that companies now fill 60-70% of jobs externally. Perhaps it is no surprise that employers are complaining more about problems associated with hiring, because they are doing a lot more of it. It is entirely possible that the problems employers say they are facing have nothing to do with what’s happening on the labor side of the equation, but rather relate to trends in their hiring.
What are Employers Seeking?
In keeping with the decrease in employer-provided training, the number one thing that employers seek in new hires is experience. This is true even when it comes to hiring people just out of school. The most important credentials employers look for in hiring people coming out of school include internships, employment during college, volunteer work, and extracurricular activities—in other words, the very things that give students work-related experience. Comparatively, employers do not appear to care about grades or other academic traits, such as college major.
It makes sense that employers would prefer to not invest in training new hires if they don’t have to, and would want employees to develop workforce skills on someone else’s dime. The economics of employer-provided skill development offer clear lessons on this point, when one examines the value a typical person brings to an organization over the course of a full career. A new employee right out of school, with no experience, doesn’t provide much value. But there is a steep learning curve, with an investment from the organization—even if that investment comes simply in the form of tolerating sloppy performance in the short term. While compensation to the employee goes up over time, the value created by the employee increases even more steeply as they gain knowledge and experience. Since the value the employee brings to the organization is rising more quickly than the compensation, the employer is making money (and thus earning a return on their initial investment) on that more seasoned employee. Employers complain, however, that employees tend to leave as they move along the steep learning curve, lured away by competitors that can pay them more because they do not have to train them. The original employer therefore fails to recoup their initial investment. For that investment to pay off, employees need to stay for the long haul.
Thoughts for the Future
Although they may not get more involved in job training, employers will eventually adjust and become less picky about finding job candidates that meet all of their idealized qualifications.
But other changes would help too.
Steps could be taken to shorten the supply chain by encouraging closer relationships between schools and employers. This had been a major policy objective a couple of decades ago, when Congress in 1994 passed the Schools to Work Opportunity Act. Its goal was to fund projects that would bring employers and schools together—not just by facilitating the transition to work through co-ops and internships, but by trying to get employers into schools to show students applications for their learning, as well as getting schools out to workplaces to better understand the educational requirements for particular jobs.
Another way to shorten the supply chain is to create more apprenticeships. There are plenty of examples of apprentice-type programs that already exist and thrive in the U.S.—for instance, new doctors that have to complete internships or fellowships; lawyers who work first as associates under more experienced practitioners; and entry-level positions at consulting firms that entail structured mentoring and feedback. Apprenticeship means that the employee shares the cost of development with the employer. The employee gains by getting on-the-job training directly suited to the work they’re doing, and the employer risks less in training someone who might eventually be lured away by a competitor.