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Patrick McHugh lectures to an information technology class at the Milwaukee Area Technical College in Milwaukee, Wisconsin, U.S., March 28, 2019.  Photo taken March 28, 2019.  REUTERS/Howard Schneider - RC1EAFE78850
Up Front

Policymakers can help businesses retrain their workers

As technology advances, gaps often emerge between corporate needs and worker skills. These gaps can lead to vacancies as companies have difficulty finding workers to fill these positions. Unless skills are upgraded, these vacancies can become persistent. For example, 40 percent of American employers say lack of skills is the main reason for entry-level job vacancies, and almost 60 percent complain that workers are not sufficiently prepared, even for entry-level jobs, according to McKinsey & Company.

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The labor market is currently reasonably tight, with a relatively low unemployment rate and steady job growth. But persistent vacancies due to skill mismatches are an important problem for businesses, workers, and the overall economy.

THE C-SUITE IS STARTING TO ADDRESS THE PROBLEM

Recognizing that worker shortages are a hindrance to growth and profitability, several high-profile firms have either invested or pledged to invest in retraining members of their existing workforce for emerging jobs within the company. Accenture, the multinational consulting firm, has pledged to retrain workers at the cost of one billion dollars a year in response to new skill needs. Amazon recently announced a $700 million investment through 2025 aimed at upskilling workers, thereby enabling these workers to move to other positions either within the company or beyond. Other companies, such as IBM, have created apprenticeships to train future tech workers, some of whom are in non-technical positions, allowing interested workers to learn new skills while earning a middle-class salary.[1]

This movement among corporations to invest in training and upskilling is a clear signal that the skilled worker shortage is real. And many of these investments, especially those aimed at operating advanced equipment, working with AI, and software coding, can be considered what economists call “investments in general human capital.” That is, they are skills transferable across firms.

While some firms may not be interested in investing in transferable skills because they may lose trained workers, the fact that others are moving in this direction is an important signal. Firms often seek to minimize investments in education and training that would be valuable to other firms as they may not recoup the return on that investment if the employee goes elsewhere. Large firms choosing to invest in retraining workers rather than just relying on the job market to fill these positions may suggest that they view the costs associated with search and delay to be too high. Furthermore, in-house training programs provide the added value of reducing adjustment costs for workers, because these workers have already successfully navigated some of the key aspects of joining a new firm such as culture and norms.

Now policymakers should do more, too

Policymakers ought to use this opportunity to support and expand these initiatives by fostering public-private partnerships aimed at improving skill matches between employers and employees among firms of all sizes. Potential approaches include:

  • Making federal and state tax credits available to firms who provide systematic retraining and upskilling programs for workers at their firms who are at-risk of displacement due to technological change. As my colleague Isabel Sawhill notes in her recent book, The Forgotten Americans, such “active labor market policies” may be a key mechanism to equipping workers with in-demand skills and matching them to employers that need them.  Larger tax credits can be directed at smaller firms to ensure they have the incentive to participate as well.
  • Supporting the establishment and expansion of apprenticeship and other on-the-job training programs by providing tax credits and funds for firms to bring in additional expertise to help train workers. Research presented in a recent volume  published by the Hamilton Project at Brookings highlights how apprenticeships help provide alternative pathways to rewarding careers that do not rely on the  typical “academic-only” educational track.
  • Provide funding, personnel, and other incentives to local universities and community colleges to partner with local employers to revise or develop coursework and programs that are better connected to employer needs.

Of course, government-supported training programs for displaced workers are not new. The first large-scale training legislation, the Manpower Development Act and Training Act, described in Barnow (1993), was passed in 1962 with the specific intention of retraining workers who were displaced by technological change. Additional programs aimed at fostering worker retraining have passed over the subsequent decades. Unfortunately, evidence on the effectiveness of these programs is not very encouraging. The Job Training Partnership Act (JTPA) of 1982, passed under President Reagan, provided billions of dollars for job training for the poor. Outcomes were largely mixed. Evaluations such as the National JTPA Study found modest improvements in earnings outcomes for adult participants and virtually no effect for adolescents. However, there were problems in both implementation and administration. In particular, critics argue that much of the training had too little input from employers and workers. The JTPA was eventually replaced by the Workforce Investment Act in 1998 with the intention of allowing more private employer involvement, but as noted in Barnow and Smith (2015), there is little evidence that this happened.

So more effective programs are needed. But the alternative, of doing nothing in the face of inevitable technological change and automation, is not viable. Amazon, for example, claims full automation of its warehouses is about a decade away. Appropriately designed programs that support workers and are closely tied to employer needs may be more effective and, in the case of in-house programs, require a much smaller investment than sending workers back to school for a 4-year degree.

[1]Disclosure: IBM provides support to the Future of Middle Class Initiative.

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