Helping businesses invest in skills development

Helping businesses invest in skills development

Because the private sector creates the most employment globally, we need to pay attention to how we can encourage private businesses to invest in skills development. Private business owners must come to see how a more skilled workforce will improve productivity, business competitiveness and profitability.

Moving beyond workers as a cost to business

A key starting point is understanding the importance of workers and skills development. In many countries, labour is treated as a drag on business—a cost. Businesses that adopt this perspective typically do not pay their staff well, provide the right working conditions, or invest in training.

When it was created in 1919, the International Labour Organisation was founded on the principle that “labour is not a commodity.” This expresses the view that people should not be treated like inanimate commodities or capital, another mere factor of production or resources. From a humane perspective, workers should be treated fairly and equally. These issues are more recently encapsulated in the term Decent Work.

Labour is critical to achieving business success.

From a business perspective, labour is critical to achieving success. Workers are partners in this goal. This is not a Socialist ideal. It is a key to success in a free market economy.

Ensuring worker rights is essential. Capitalist pressures seek to erode rights wherever possible. Governments have a role to play in ensuring worker rights and labour standards. They also must provide the legal space for workers to organise and be represented.

Most workers want a job that pays a decent wage and offers some satisfaction and security. However, workers don’t always see themselves as partners in a business success story.

This is primarily due to the increasing change in the global economy and the increasingly complicated link between profitability and wages. It is often neatly summed up as how “economic growth has become a spectator sport”—where too many poor and middle-class households watch as GDP, productivity, the stock market, and corporate profits rise while their incomes either stagnate or grow much more slowly.

The link between skills, productivity and growth

Helping private business owners and managers understand the value of skills development is important for everyone – workers, businesses, the economy and society.

Studies have shown that skills raise productivity (i.e., total factor productivity and labour productivity) in several ways:

  • Skills enable workers to undertake more complex tasks, to work more effectively and to produce higher-value products.
  • Investment in innovation and technology is more profitable when combined with skilled labour.
  • Skilled workers are better at adapting and responding to changing work environments and implementing new technology and processes.
  • Workers often learn from highly skilled co-workers.

While these effects can benefit the broader society, skills also impact productivity in other ways. Skilled labour directly increases human capital in a firm – or a region or country – and indirectly creates positive spillover effects on the productivity of other workers and through other drivers such as innovation and investment.

At the economic level, the evidence shows that productivity gains result in lower prices and higher real wages and incomes. In turn, this leads to greater demand, which stimulates production and employment. Moreover, productivity growth contributes to higher levels of well-being.

Skills development in the informal economy

Investing in skills development is a key instrument for supporting the transition towards formality. While the informal economy is mainly unorganised and challenging to work in, skills development brings many benefits in addition to the firm-level benefits described above. A more skilled workforce will improve firm competitiveness and encourage business owners to explore and enter new, more profitable markets. Training also contributes to better pay, working conditions and participation in social protection schemes.

Two challenges: freeloading and asymmetrical information

There are two common challenges that businesses face when considering whether to invest in training their workforce.

The first challenge is freeloading. Put simply, why should I invest in training staff who, once trained, may be poached by other businesses? While freeloading is a problem, there are ways around this from a business management perspective. The level of freeloading also varies across sectors and subsectors. Thus, business owners and managers can also benefit from training that improves their capacity to manage workers and invest in staff training.

The second challenge many private businesses face when considering whether to invest in training their workforce concerns asymmetries in information. Businesses often lack the information to make appropriate purchasing decisions concerning their needed services. Training providers are often better informed, and businesses cannot make informed choices regarding what training is needed and how it is best provided. This often results in a decision not to invest in training or investments in the wrong kinds of training.

The role of government in the labour market

The labour market is a place of exchange. It encompasses the supply of and demand for labour, for which employees provide the supply and employers provide the demand.

Like all markets, governments have a role to play in the labour market. This is achieved through labour market institutions (e.g., minimum wages and employment protection legislation), aggregate fiscal policy (i.e., changes in public expenditure and taxes), and specific labour market policies and social protection programmes, such as support for vocational education and training.

Increasingly, governments are becoming aware of the need for greater interaction with private employers in identifying skill needs and delivering training programs. This includes work-based learning, such as apprenticeships, and what is often described as dual (i.e., public and private) vocational education and training.

Facilitating improvements in the market system for skills development

Market systems approaches provide a useful lens to view the market in which private employers and workers, including job seekers, interact. A market systems approach recognises the role that incentives play in constraining or creating opportunities for skills development.

A market system consists of a core exchange between actors. There are two core features of a market system approach:

  1. This involves working with local stakeholders to drive change processes that attempt to address the root causes of key development problems by unlocking their own incentives and capacity.
  2. Adaptive management. This allows for interventions and activities to be adjusted based on changes that may take place in the market or its surrounding context, new knowledge and insights, and regular results measurement. Often, there are unintended changes in the system that need to be addressed.

Experience applying a market systems approach to skills development has shown that even if the key problem is a skills gap or mismatch between supply and demand, the root causes include many other factors, such as weak technical expertise, asymmetric information, distorted financial and non-financial incentives, rules and regulations and prevailing perceptions, attitudes, social norms and informal rules. These issues influence behaviour and the interaction between local actors.

Filling immediate gaps in the capacities and incentives of local actors does not address the root causes of these problems. Instead, program interventions should involve many stakeholders in the skills system. A portfolio of interventions is required to drive systemic change.

Investing in skills development is good for everyone

Private businesses should be supported in their efforts to invest in skills development. This requires a careful balance between supporting supply and demand-side issues.

I think regular engagement with business owners, managers, and their representative organisations is essential. While functioning labour markets are essential, so is the need to help private employers better understand how their investments will improve productivity, business competitiveness, and profitability. This also contributes to economic growth, equity, and social well-being.