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Who pays for Skills?

More than 90% of our employment markets are in the unorganised sector largely contributing to the cash economy. Technology brings transparency and calls for accountability whenever it is used. Data analytics and Artificial Intelligence are increasingly used today to drive systems both within the government and outside. Resulting increased efficiency has a downside in changing the contours of current jobs by seeking higher order skills so that one is not rendered redundant. Debate has it that AI has made a dent in the employment markets. It certainly improves our world in many ways, but there are concerns regarding the impact, on employment and the workforce. Intelligent agents of AI help in perceiving the environment and take actions that maximize the chance of successfully achieving the end goals. Colloquially, AI is applied when a machine mimics cognitive functions that humans associate with other human minds, such as learning and problem solving. Flip side is a reduction in jobs.

Training, re-training and up-skilling therefore are hugely important to stay relevant. However, all this comes at a price. Who foots the bill? Is it possible for the Governments to pay for the training and acquisition of new skills, where a private entity makes all the profits? Are Industries investing enough on the skills of their employees? As a result of rapid technological change, companies today face shorter business cycles and truly global competition. Few industries are safe from disruption. Are current skills funded by the government at an entry level sufficient to provide a meaningful job? The skill mission in the country must ponder on several of these questions to succeed.

In modern economies, a large portion of human capital investments take place within firms in the form of training. Most economic analyses of training are based on the paradigm that a worker should pay for any general training which allows him/her to use the new skills when employed by other firms. Inefficiency occurs mainly because workers may be unable to pay for their training and also unable to commit to not quitting their firm after employer sponsored training. Yet this source of inefficiency does not seem particularly relevant for many instances of training in the real world. For example, in Germany which has the most developed system of privately funded training, firms bear a large part of the cost of training while apprentices are often paid attractive wages. In the U.S. firms often pay for the vocational training courses of their employees. Individual choices are also causing problems in the labour market. Companies understandably ask: why should I train you if you’ll leave and work for my competitor? However, with talent shortages looming, the need to retain employees may soon tip the balance back towards greater investment in development programs. By providing learning opportunities, employers must realise that they could become a talent destination.

When labour markets characterized by costly mobility and search are considered, workers will not receive their full marginal product in future jobs. Because employer rents do not feature in workers’ calculations, underinvestment in training will result. In other words, in an imperfect labour market future employers of a worker will also benefit from his skills. That said, should not the industries be investing in skills of their employees and not the government? However, this is an externality that the decentralized market will not be able to internalize.

There are predictions of millions of unemployed people in the next decades, primarily due to the impact of Intelligent Automation and AI. In any case, the entire socioeconomic system is entering a phase of accelerating transformation: markets, businesses, education, government, social welfare and employment models will be severely impacted. Transformation seeks new skills, new revenue models and a new resolve minus which Governments and their people, both will fail. Hence innovations in the way businesses are conducted are necessary.

In a frictional labour market, part of the productivity gains from general training will be captured by future employers. As a result, investments in general skills will be sub-optimally low, and contrary to the standard theory, part of the costs may be borne by the employers. The interaction between innovation and training leads to an amplification of this inefficiency and to a multiplicity of equilibria. Workers are more willing to invest in their skills by accepting lower wages today, if they expect more firms to innovate and pay them higher wages in the future. Similarly, firms are more willing to innovate when they expect the quality of the future workforce to be higher, thus when workers invest more in their skills. The question However, is, where will the investment come from?

Rather than hanging on to a job for life, the goal today is to be employable, to develop the skills, experience and expertise necessary to move on or up, regardless of the employer. Ideally, this gives people greater choice and flexibility to ride career waves or slow down at different stages of their longer working lives. As employers adapt to this workforce trend, wages and opportunities will increasingly be dictated by skills, not tenure.

A more intense search for talent is beginning, and we are already seeing interesting people practices emerge. Many Industries have pioneered flexible working, phased retirements, encore careers, and a slew of knowledge transfer programs to train the next generation. Skill Mission too will need to explore new ways of delivering social benefits that suit non-traditional work. Focusing on employment for life, rather than protecting specific jobs in companies, will increase workforce numbers and mobility, protect the individual and encourage lifelong learning and development.

The time is ripe for new thinking in the labour market. The current system feels broken. It seems ill-suited to the structural changes that are occurring at an increasing pace. As a result, we see high unemployment with unfilled jobs, rising productivity with stagnant wages, and economic recovery with declining upward mobility for many.

Fortunately, the present dysfunction and apparent contradictions are spurring changes. Rather than returning to business as usual after the recession, the labour market is settling into a new normal. If we chart our course well, we can navigate the changing world of work and unleash new employment opportunities and economic growth for the Fourth Industrial Revolution.

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