2.4 Complementarities and productivity improvements
At some point, additional expenditure on education or training will lead to decreasing returns from those investments.[5] For firm productivity to improve beyond that point in response to additional investments in education or training, and overcome decreasing returns, increasing productivity is required from the use of skills with other production inputs (see Maré (2003)). These complementarity effects can occur in various ways, such as enabling the more effective use of new technologies. Here improvements in workforce skills increase overall returns by raising the productivity of other resources. Because of the particular economic characteristics of knowledge, Dowrick (2003) argues that “complementarity is probably more pervasive in the accumulation of skills than in the accumulation of objects.” If the gains from these complementarities are strong enough, the effect of diminishing returns to further investments in training may be overcome.
Complementarities are likely to influence firm productivity in a number of ways. For example, skills can be combined with other inputs by the firm to increase returns, such as R&D activities or using new technologies, or in conjunction with organisational change. Combinations of skills may be brought together in teams, and the mix of skills can yield synergies that are productivity enhancing. Knowledge transfers (or spillovers) can occur between firms where the knowledge acquired by one firm (for instance in R&D activities) can benefit other firms in the industry or in the same location, and through employee movements between firms. Knowledge can accumulate via training or learning-by-doing, where stocks of knowledge or skills acquired in one period complement the skills available for use in the firm in the next.
These complementarities need not be externalities. They may be able to be captured, at least in part, by various “Coasean institutions”. If complementarities can be priced, for example, private and social benefits are equated. Over time, one would expect organisational approaches to be sought to take advantage of these complementarities, and so internalise these spillovers to some extent. Some may be internalised by individuals. Entrepreneurs, for instance, are thought to possess a range of complementary skills. They may also be internalised within firms – such as opportunities to internalise gains from R&D expenditures through patents. There may be scope for internalising firm-level spillovers through industry associations, joint ventures, clusters and vertical integration. Where these effects are unable to be internalised by private institutions, at reasonable cost, there may be a case government intervention.
Notes
- [5]For the purpose of illustration only, Krueger and Lindahl (2001) suggest that relationship between education and GDP growth is often modelled as being linear, whereas it seems to them to peak at about 7.5 years of education, which is less than the average level of education for OECD countries.
