7.3 Knowledge spillovers
The third mechanism whereby increases in an individual’s skill levels might give rise to improvements in the productivity of firms is through the direct effects on other workers or other firms. The importance of these knowledge externalities or spillovers is hard to assess. The actions of senior managers can have effects on subordinates, while knowledge management systems and mentoring facilitates knowledge transfers. Increased individual skill levels can have substantial effects on the productivity of co-workers and firms. There is evidence that where a person works can explain as much of earnings variation as does worker characteristics. The processes and practices that managers put in place can therefore substantially influence workers’ effectiveness and wages, or be reflected in the intangible value of the firm.
Knowledge spillovers also occur between firms in an industry. Where the stock of shared knowledge in an industry is greater, firms will be more productive. These spillovers can occur through three mechanisms, namely the sharing of inputs, matching, and learning. Evidence on these effects has proved difficult to obtain, but the matching effect appears to be more important. Thicker labour markets allow better matches between firms and the skills required, as well as increased specialisation by workers. Geographical proximity also encourages spillovers associated with learning, by easing the transfer of information, especially of tacit information, through face to face contacts.
Nationally, low skill levels and skill shortages may influence the choices by firms about the technologies to adopt. It has been argued that a coordination problem exists between the demand for and supply of skills, which leads to a degree of path dependence in decisions about technology adoption and skill investments. Given relatively long development times, firms may choose technologies conditional on the expected supply of skills in the workforce, while educational investment by individuals may be influenced by expectations about the availability of jobs.
The factors giving rise to low technology/skill matches are clearly important, and will influence the role for government. However, it is not clear what perpetuates low skill equilibriums over time, or hinders economies from transitioning out of them. There is evidence for the UK that persistent shortages of skilled labour may be influencing technology adoption and capital investments. The case for further increases the supply of skilled workers depends on whether other factors are more critical. The UK evidence that a systems failure is involved requiring a coordinated response across a range of policies and institutions is unclear about policy specifics. There may, for instance, be significant costs associated with firms changing their input mix, given sunk investments in capital, labour, technology and organisation, leading to slow rates of adjustment. For instance, more recent evidence points to the importance of building up organisational capital to obtain the productivity benefits of ICT use. The policy specifics here will be influenced by the economy being analysed.
7.4 Work-based skill acquisition
The adequacy of work-based training is important for a number of reasons. First, with ongoing technical change, continuous learning will be required to maintain the stock of skills in the existing workforce and offset skill obsolescence. Second, much knowledge accumulation occurs on the job. Those leaving school with few educational qualifications are likely to face more limited training opportunities in the workforce, which will tend to amplify the skill gap rather than compensate for low levels of educational attainment. Third, the persistence of skill shortages may be affecting technology adoption and capital deepening. If labour shortages continue, firms will need to respond by increasing training and/or substituting capital for labour in future investments.
The dominant view of human capital formation in the workplace is that the market will provide general and firm specific forms of training in sufficient quantities, with no need for government intervention. However, a good deal of contrary evidence exists, especially on the extent of employer-funded general training, and on wage growth following training being much less than productivity growth. This implies that labour market imperfections are occurring to some extent, and that employers and workers will tend to under-invest in training. However, the literature provides little evidence of either the level of imperfect competition or of the size of the under-investment effect.
More sharply focussed policy work is warranted here. A major consideration concerns the nature of the market failure that the intervention is seeking to target, such as information asymmetries, imperfect competition in the labour market, or credit constraints. The design of any interventions depends on which types of market failure are thought to be more important. A number of co-financing arrangements are being used in OECD member countries that allow employers and workers to generate more tailored training assistance packages and encourage lifelong learning outcomes. They provide scope for training programmes to be negotiated that yield the types of skills needed by firms. The extent of regulatory and/or institutional failure with particular interventions would also have to be taken into account, such as encouraging the substitution of formal general training for informal or customised training, or shifting the costs of training onto taxpayers with little increase in training.
