A publication of the Indiana Business Research Center at IU's Kelley School of Business
Share | |

Has the Grass Turned to Mud? Employer Concerns about Skilled Labor

Timothy Zimmer

The press is filled with numerous articles detailing the lack of adequately trained workers. Firms complain that they are unable to find those with the specific skills required. The argument holds that the state should refocus educational efforts to eliminate this gap in specific skills. Traditionally, government taught fundamental and softer skills which could be transferred to numerous positions within the economy. Despite the recent turn in literature calling into question the skills gap,1 the state is increasingly being asked to teach specific skills. With data suggesting growth of educational attainment over time, one could question how this public policy debate evolved? The answer to this question may come from examining old England.

In the development of England, towns were established and governed by the citizens. At the time, agriculture was a vital part of prosperity. In an effort to aid the local farmers, the town would secure a piece of land and protect it from citizens of adjoining towns and predator animals. Any citizen within the town could graze their livestock on the common area, which became known as the town “commons.” Interestingly, in the years following the establishment of the town’s commons, these areas would often times become a muddy wasteland rather than a point of town pride. This phenomenon would later be known as the “Tragedy of the Commons.”

One aspect of shared resources is that the benefits of use are accrued to the individual but the costs are borne by everyone. If one herded sheep in England, the addition of more sheep to the individual’s flock benefited the person. As the common area was owned by all, the individual cost of having more sheep grazing was very little. Since every herder faced the same incentive structure, sheep became plentiful and the commons were quickly reduced to muddy fields due to overgrazing. The solution was to have private ownership of grazing rights, or forms of sanctioned resource rationing. If one grazes their own land, for example, the cost of overgrazing would be entirely felt by the individual (in the loss of the herd as it starves). Thus, the true benefits and costs are known at the individual level, and any incentive to overgraze is lost.

The “Tragedy of the Commons” is well known in resource economics literature, but less so in labor economics. However, what is a nation’s primary resource if not its workforce? For this reason, the lessons learned from the commons in old England should be a concern for labor economics.

My father would often tell me that he went to school to “learn how to learn.” After graduation, the company that hired my father spent three years training him in their management program. He went to numerous facilities all over the country and learned all aspects of the company. In contrast, in my generation, it was expected that the university provided direct skills, while the company, upon hiring, provided a three-hour orientation.

Why the difference in training experiences in one generation? Over time, some companies realized that they could forego the cost of training by hiring individuals a few years removed from school who had already gone through the training programs of other companies. The incentive structure rewarded companies that could shift their training costs to other companies. The firms that still provided employee training quickly realized they were paying the training costs for everyone else and ceased such training. The entire private sector training infrastructure quickly deflated and was put on the backs of universities or the public sector. Adding to the ease at which company training was dismantled were the vast green pastures of skilled and trained workers. The corresponding cost of not training was small in the short run.

The true extent of the problem caused by cutting training would take years to materialize. Most of the Boomer generation had received sufficient training and experience, and their numbers were plentiful. However, as the Boomers began to move out of the workforce, the newer generation did not have the benefits of sufficient training programs for specific skills. It was at this point that the true cost for the lack of training investment by the private sector in the labor force started to be revealed. The commons had turned from grass to mud.

Given the positive externalities associated with education, the state has a clear incentive to provide education to its citizenry. However, the lack of specific skills is at least partially the result of insufficient private sector training. Addressing the issue with market solutions could be beneficial as it allows for the market to determine the most efficient allocation of labor force skills. Companies might be better served by providing the training themselves, or providing sufficiently high wages to incentivize individuals to acquire needed skills.

Notes

  1. For one example, see Allison Leeuw et al, “Indiana’s STEM Pipeline: A Surplus of Graduates,” InContext, July-August 2014, http://www.incontext.indiana.edu/2014/july-aug/article2.asp.