Productivity Matters & Technology Matters Part III: Quality of the Labor Force

Our last discussion took us relatively close to the austerity-versus-stimulus debate, as we looked at the marginal impact that debt could have on the level of a country’s productivity—which is measured as Total Factor Productivity (TFP) and is a significant contributor to growth throughout the Caribbean region.

More specifically, we looked at the work by Abdychev et. al (2014), in which the researchers suggested that a debt-to-GDP ratio over 80 percent can become a drag on a country’s level of efficiency and productivity. Nevertheless, like I had said before, I’m not one to advocate for the setting of some hard-and-fast rule regarding debt ceilings; and, I’m certain Nobel Prize winning economist Paul Krugman—who takes quite a bit of “punches” for his anti-austerity and Keynesian-style positions—would be first to say “Amen” to that.

Personally, I hold the view that the “spend-or-not-to-spend” argument really depends on the unique economic conditions of a country. It also depends on what the money is being spent. I will return to this point later in this article when we look at the skill mismatch in Belize. For now, let’s continue with our productivity focus.

Skills Mismatch and its effect on productivity
We had already established in last week’s Ripple that there are several factors that affect productivity levels in an economy. These include macroeconomic conditions (inflation and debt), quality of labor inputs & efficient allocation (including skills mismatch), and institutional & regulatory factors (see Abdychev et. al 2014, p. 7).

This week, we turn our attention to the role that skill mismatch has on productivity levels. Last September, The International Labor Organization (ILO) published a report in which it stated that between 25 to 45 percent of the employed labor force in Europe are either over- or under-qualified for their jobs, leading to what is most commonly referred to as a “skills mismatch”. The report, entitled “Skills Mismatch in Europe,” stated:

“Labour market actors, including governments, companies and workers, need to ensure that occupational requirements are matched through adequate education and training. The extent to which this process is successful is a major factor shaping labour market outcomes, economic growth, PRODUCTIVITY and competitiveness. …. If workers are overeducated for the jobs they perform, for example, this means that firms are not fully utilising the PRODUCTIVE capacity of their workers, while under-education means that firms are not operating at their PRODUCTIVE frontier by employing less productive workers than they should.”

I’m sure you’ve noticed the word “productivity” that we’ve been discussing for the past few weeks re-emerging. I think we could all agree that having high levels of unemployment is bad for any economy; however, as mentioned in the ILO report, having a significant degree of skill mismatch in an economy can also bring its own issues to the table.

What empirical evidence is there?
Quantitatively speaking, Abdychev et. al had sought to measure the impact that skill mismatch has on productivity. They found that “TFP growth [that is, growth in overall productivity and efficiency in how factors of production are used] significantly declines as the level of skill mismatches increases.” They added: “For every 10-point increase in the skill-mismatch index, TFP growth tends to decline by about 0.03 percentage points” (Abdychev et. al, 2014, p. 15).
As I’ve stated last week (July 5th, 2015, issue of The Reporter), the study’s authors had used multiple econometric techniques so as to cross check their work. Referring to the same 10-point increase in the skill-mismatch index, the other two statistical methods found that productivity declines by 0.2 and 0.5 percentage points, respectively.

What is also noteworthy is the level of reliability (“significance”) attached to these findings. While the first and third approaches yielded results that are 95 percent reliable (meaning that there was only a 5 percent chance that the results aren’t spot on), the second method’s 0.2 percentage point decline was found to be 99 percent consistent—meaning that there’s only a one-percent chance that the finding was inaccurate.
Also, please recall, with all things being equal—that is to say, we’re assuming there isn’t any significant change(s) in the amount of capital or labor—the decline in efficiency and productivity leads to a decline in economic growth.

Step in the Right Direction
Now, not only can we agree that human capital development (HCD)(education and training) matters from a qualitative standpoint, studies like that conducted by Abdychev et. al (2014) help us to see that it matters from a quantitative perspective. And it illustrates that HCD is important for addressing unemployment as well as raising the productivity of the labor force.
While data availability concerns here in Belize would cause the robustness of any estimation of our skill mismatch index to be met with a due dose of skepticism, I refer to an observation made by David L. Lindauer in his 2014 Inter-American Development Bank (DB) report, “Labor Market Performance in Belize”. Therein, Lindauer writes:

“The difficulty in identifying missing skills is captured by the experience with a government-run training course. In 2011, the Belize Trade and Investment Development Service (Beltraide) offered a two-week course on basic technical and customer service skills useful in call center work. After the course, all 150 participants found jobs quickly. If all that these individuals needed to secure employment was a few weeks of training and a certificate, this suggests that their general education was adequate and that the problem may have been more one of signaling than acquiring skills. Employers may have valued the skills acquired, but it is just as likely that employers were responding to the initiative these individuals demonstrated in enrolling in the course” (p. 33).

Lindauer, of course, went on to recommend that Beltraide continue said course. Since then, the government has established the Belize Technical and Training Center (BTEC). Certainly, this initiative is a step in the right direction! While initially focused on the Business-Process-Outsourcing (BPO) industry—which benefits from a sort of “Big Push” from government (another factor that could have contributed to the training program’s success)—BTEC’s Director Christine Smith, in an interview with the media, had explained that BTEC is designed to provide “demand-based” training.

“We’re looking at specific industries and [we’re] looking at what are those skill sets needed for those industries,” Smith said. “BTEC’s aim is to increase the employability skills of YOUNG people, as well as persons who are seeking employment.”
It is important that I underscore the specific focus on youth. They account for over 40 percent of the total pool of unemployed workers; therefore—as Lindauer put it—“unemployment in Belize has a youthful face” (Lindauer, 2014, p. 30).

Moving forward, precise data is needed
However, in a country with fiscal constraints, there is the need to know precisely where and to what degree resources need to be channeled to various groups to address the skills mismatch issue. “While the experience with Beltraide’s customer service training program was positive, it also illustrates the difficulty in determining the extent of skill mismatches and the business complaints about an inadequately educated workforce” (p. 30). He goes on to state that the requisite intervention for each group may vary. These differences necessitate the need for the policy makers to know the size of these sub-groups; because, again, without this data, it becomes difficult to know where exactly to channel the dollars and other resources, including time and man power.

This problem is compounded by the fact that there are several other factors that give rise to the skill mismatch among Belizeans. Lindauer put it this way:

“More young people would find jobs if the economy grew more quickly, resulting in an increase in overall labor demand. Some young people may have limited success finding jobs because of a mismatch between SKILLS REQUIRED BY THE LABOR MARKET and THE EDUCATION they received IN SCHOOL. Still other youth may be ‘unemployable’ because of an absence of basic behavioral and life skills.”
In terms of the mismatch caused by the gap between what’s demanded and what is supplied by the school system, this speaks to the need for academia and the private sector to work together to correct this issue. At a glance, it must be noted that labor demand appears to be much more skills-centric than it is “grades-centric”. What does that say about any education system that places the bulk of the focus on standardized tests and not on skills development (including soft skills)?

Austerity-and-Stimulus debate
At this juncture, I return to Abdychev et. 2014 who recommend that small-middle-income countries “need to improve the quality of public spending, MOST NOTABLY on EDUCATION to minimize the skill mismatch in the labor market.”

This talk of public spending brings us back to the earlier allusions to the austerity-versus-stimulus debate. Let me ask you this: In your view, would spending on education and training be a valid reason for increasing debt—even if that meant debt levels would creep above Abdychev et. al’s 80 percent threshold (maybe 83 to 85%)? Or is that akin to stopping one disturbance by causing another disturbance?

To put it succinctly, such a policy would have to show that the marginal returns to productivity outstrips the costs of incurring the debt. And, honestly, those returns can very well outshine cost. I say this because one of the leading benefits of having a better trained work force is that it becomes easier for economies to adopt and diffuse new technologies—which is another factor that helps to improve productivity levels (which by extension augments long-term economic growth). Moreover, higher human capital levels can also serve to attract Foreign Direct Investment (FDI), as well as improve Research and Development capabilities.

As Abdychev et. al put it: “An increase in human capital base can have a positive impact on TFP (productivity) growth by facilitating structural change and technological improvement…[it can also] help to absorb positive externalities from international trade and FDI.” In terms of explaining why productivity may decline, they added: “The gaps between the supply of and demand for skills could account for the decline in TFP growth, especially in low-income countries that make use of technology developed by advanced economies” (Abdychev et. al, 2014, p. 5).
To make the argument that such human capital investment are worth inching above the aforementioned 80 percent threshold, in my view, could be valid. To say so, however, would immediately imply the need for empirical data to inform the scope of such an approach.

What about the employed?
Another point that must be made is the fact that the above section discussed Belize’s skill mismatch in terms of unemployed youths. While extremely important to the Belizean reality, as can be gleaned from the excerpt from the ILO regarding Europe’s problems with skill mismatch, this matter speaks also to those who are employed in positions that they’re either over- or under-qualified for.

This is also problematic because when people are employed in a jobs that they’re “over skilled” for it can lead to waste of skills that individuals had acquired. Because over-skilled workers generally earn less than their “well-matched” counterparts, the probability of them being less satisfied at work is relatively higher, resulting in a potentially high turnover rate. This, of course, can directly affect firms’ productivity.

In terms of the under-skilling, as we’ve alluded to above, this also affects productivity, slowing the adoption rate of new and more efficient technologies. Therefore, the skill mismatch variable is a concern for both the employed and unemployed aspects of the labor force, and because of its effect on productivity (and by extension long-term growth) further emphasis must be placed on correcting this human-capital related issue.

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