The political economy of skills

by Henry Farrell on February 16, 2012 · 4 comments

in Political Economy

Matthew Yglesias proposes that employers should tackle problems of skill shortages themselves.

On a firm level obviously one solution here is to just pay higher wages and hire away someone else’s machinist. But there are still only so many machinists to go around. At some point the reasonable thing to do is to find a less-skilled worker who has less bargaining power and lower wages, hire him, and teach him to do the damn job. I was neither the first nor the last entry-level worker at the American Prospect who had some fundamental gaps in my skill set but who was still a worthwhile hire since I was working for cheap. On the job, I gained a lot of valuable skills and training. It worked out great.

However, it may not work out so great for the employer, who is unlikely to be able to capture all of the rents from this training, as Matt’s own career (from Prospect to Atlantic to Center for American Progress to Slate) demonstrates. The American Prospect did all of Matt’s future employers a considerable service, by helping him address the fundamental gaps in his skill set, but they haven’t received any direct compensation for it. Probably, they don’t care about this that much (my understanding is that the fellowship that Matt was on is designed in the hope and expectation that many of its recipients will go on to do wonderful things elsewhere), but other employers, such as employers of machinists, may not be quite so public spirited. They will perceive the risk that they’ll train someone up, and he’ll promptly defect to another employer, and hence be disinclined to do much training unless they absolutely have to.

The standard story in the political economy of skills literature is that this is a collective good problem – if some of the benefits of training are not captured by any individual employer, then there will be underinvestment in training. There are solutions to this problem of course. German employers in e.g. the mechanical engineering cluster in Baden-Wuerttemberg train machinists, but they do so through collective schemes, which spread the costs and the benefits among most of the relevant potential employers. Hence, they are able to support a nicely functioning high skills economy. In the US, there are few such collective institutions, and rather less emphasis on skill training, leading to a lower-skills equilibrium, and more focus on general training, acquired by the worker rather than provided by the employer.

Specialized high skills economies differ from general-skills economies in a number of different ways. The person most associated with the study of these differences in political science is Torben Iversen (who kindly provides most of his articles online for public reading). For example, this piece argues that differences in skill formation help explain attitudes to the welfare state. Roughly speaking, people with specialized skills will be more likely than people with general skills to support a strong welfare state. Their asset, being more specialized, is riskier – hence they will have incentive to push for a safety net that can provide them with a buffer in bad economic times.

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