Creating skilled workers and higher-wage jobs

Harry J. Holzer

The March jobs report released last week showed both limited wage and employment growth among workers.  As the job market continues to tighten we should eventually observe more substantial wage growth above inflation, though earnings improvement will likely remain quite modest for most workers.

Why is this the case? Some economists argue that labor market forces like technology and globalization shift demand away from middle-wage jobs (or even some higher-paying ones). Worker skills often remain too low for remaining middle- and high-wage jobs in health care, advanced manufacturing or various services, that often require more technical or communication skills and perhaps certain postsecondary credentials. In fact, many employers stress their inability to fill the middle-wage jobs they have, even at higher wages.

There are many reasons why American workers have limited skills. Though we send many people to college, too few complete their programs of study.  Among those who do, many do not obtain the credentials that the job market values – including specific certificates as well as degrees. Many students, especially among the disadvantaged, enter college with very weak academic skills, and too little information and support to succeed; and most attend community or lower-tier four-year colleges with too few resources and too little incentive to respond to the labor market. (Many others attend for-profit colleges that have other problems.)

Also, unlike what occurs in many EU countries, our high school students receive too little high-quality career and technical education or work-based learning that employers might find valuable. Policies to improve completion rates in programs aimed at high-demand sectors and expand strong career education would clearly raise worker earnings.

But employer practices and choices around job quality matter as well.  Many US employers now choose “low road” human resource models, where they seek to profit only by minimizing labor costs, rather than investing in skilled employees who would be more productive and committed to their businesses (the “higher road” to competitiveness and profitability).  But they could make other choices. Interestingly, when German manufacturers open plants in the US (where they enjoy lower energy costs and greater access to our consumer markets), they create more apprenticeships and other worker training programs than their American counterparts.

Historically, higher minimum wages and collective bargaining induced more employers to choose higher-performance models of work organization.  But, while these institutions still deserve support, they are unlikely to substantially change American human resource practices. Minimum wage increases would likely benefit, at most, just 10-15 percent of workers (while potentially causing modest employment losses). And collective bargaining will probably not grow much in the future, as private sector unionism continues its 60-year decline (perhaps now accelerated by states implementing new right-to-work laws) and public-sector unions face new challenges as well.

But, if the skill-generating human resource practices are potentially quite profitable for firms, while leaving workers better off, why don’t employers choose them more often? What economists call “market failures” might explain these choices – such as imperfect employer information about these workplace practices, or rigid wages that prevent employers from sharing training costs with their workers, or a lack of coordination across smaller firms that might also share these costs. On the other hand, perhaps employers are rationally choosing the practices that really maximize their profits, at least under current market circumstances, though the working public is made worse off by their choices. 

Under any of these interpretations, there is a potential role for public policy. Many states and cities already help foster “sector partnerships” between employers and community colleges to train workers for better-paying jobs, but more could be done to expand involvement in the partnerships and make them more successful.

For example, government (at the federal, state or local levels) can provide tax credits to employers for apprenticeships or on-the-job training for their entry-level workers; and it could provide grants to firm that use innovative strategies to improve worker performance and pay, such as creating career pathways for workers, profit-sharing, job redesign, or even more stable hours of work. Publicly funded industry centers could provide technical assistance to firms who want to upgrade their workers’ skills and productivity (much as the Manufacturing Extension Partnership does today). 

Other public tools are also available. Firms using these practices could perhaps get preference in contract procurement; or we might require firms that receive large amounts of federal dollars (through Medicare or Medicaid, for example) to do more to upgrade pay and skills among their lowest-paid workers. Even moral suasion might help – if the government highlights the successes of “higher-road” employers and grants them positive publicity.

Several labor market policies would likely complement these efforts – including moderate increases in minimum wages, publicly-funded paid leave, and labor law reform to allow work councils or other forms of employee involvement.

Most importantly, these work-based practices go hand-in-hand with efforts to improve both postsecondary and career and technical education – especially when many employers claim so much difficulty filling the higher-wage and higher-skill jobs they now have.  Employers will likely create more such jobs when they find it easier and less costly to fill them with good workers.      

We don’t know exactly which of these approaches would be most cost-effective, and in what combinations. Some experimentation by state and local governments in these efforts would be very helpful, along with careful evaluation of what works and what doesn’t.

Other caveats should be noted. Some low-skill employees would not, in fact, remain employed by firms that raise their skill standards. And we should be careful not to educate or train workers too narrowly, as future labor demand can be very uncertain in a volatile and dynamic labor market. Occasional retraining will be necessary for many workers over time.

Still, it should be a clearly-stated matter of government policy to broadly support the creation of good-paying jobs by employers, along with the education and training policies needed to create well-skilled workers to fill them.