HCI 101: Intro to Human Capital Investment

The resurgence of populism and protectionism in the western world is emblematic of a middle class that feels increasingly vulnerable to changes in the economic landscape. Middle income jobs are relocating, changing, and offering a lower standard of living than in the past. In this environment many workers feel ill equipped to make the transitions required to compete in the altered job market.

In response, instincts to focus on basic needs and return to familiarity, compounded by a reluctance to upset existing norms and institutions, have narrowed and misdirected the actions of policy makers. At a time where it is more important than ever to experiment with new policy solutions and invest in the workforce of the future, policy makers too often revert to efforts to retain obsolete jobs or/and deal with the ramifications rather than the cause of poverty.

This is the third article in a four-part series that aims to address the long-term implications of a failure to envision and invest in a coherent strategy for long term competitiveness. This third article will explore the importance of investment in human capital.

1. Research and Innovation

2. Sustainable Infrastructure Investment

3. Human Capital Development

4. Non-Discretionary Funding Investment and Innovation

DEINDUSTRIALIZATION AND THE HUMAN CAPITAL DEVELOPMENT CRISIS

Since the industrial revolution the world has witnessed rapid advancements in the nature of work. Throughout history, such shifts have incited anxieties among workers as to how they will adjust to technological disruptions. In the wake of the digital revolution these anxieties have once again resurfaced, and the global economy is searching for the path of adaptation that will propel the world into the 21st century.

While major economic transitions certainly pose a threat to status quo, they also represent an opportunity for progress. The United States’ response to the industrial revolution ultimately served as a catalyst for the country becoming the major economic power it is today.

Fundamental to the United States’ success in adapting to the changing world of the 20th century was its ability to retrain and retool its workforce to meet the demands of the labor market. The United States was the first country to offer free high school education to all its citizens. This boost in educational attainment was significant in enabling the country to successfully compete in a time of technological change and rapid globalization.

Since the miraculous growth of the United States in the middle part of the 20th century, many countries pursued similar strategies and leveraged the powers of industrialization to pull millions of people out of poverty. In each instance workforce retooling and basic education has played a significant part in realizing gains in both GDP and economic mobility.

As the United States continues to deindustrialize, firming its position on the global stage as a knowledge-based economy, the country has struggled to make adaptations similar to those made during the industrial revolution. Failure to assemble a plan that effectively retrains and retools the workforce has driven a divide in the population allowing income inequality to spike and economic mobility to plummet.

This article will explore three major obstacles facing the US economy as it continues its transformation from an industrial to a knowledge-based economy and adapts to a digitizing world.

THE DIGITAL REVOLUTION OF LABOR

The digital revolution of the last two decades has precipitated innovations intended to augment and replace human work. These innovations have impacted the nature of work across all skill levels and industries. Technologies such as automated warehousing, mechanized production lines, robotic surgeries, and marketing analytics have revolutionized the efficiency, safety, and effectiveness of company operations.

The Brookings report, Digitalization and the American Workforce, put forward a number of statistics describing the scale of the change.

As machines increasingly replace the manual work once performed by humans, jobs have shifted away from performing routine, manual work and towards managing the technology that now performs daily tasks. Illustrating this point, Henry Sui, professor at the Vancouver School of Economics, recently published research conducted on the disappearance of routine work in the American labor market.

The non-routine, cognitive jobs present in the modern economy require a different and more robust education than the jobs they have replaced. This reality has significant ramifications to both the skills and retraining needed for workers to compete in the global economy.

Further aggravating the recent disruption of the labor market, is the reality that digital technologies have accelerated the process of creative destruction in the labor market. This creative destruction is increasing the rate at which employees’ skills become obsolete. As technology advances, so does the rate at which employees will be forced to re-educate themselves to adapt to new jobs in emerging industries. Even for employees who are able to attain the skills and advanced education required to perform in emerging fields, given a decade or less, even their jobs are likely once again to succumb to the churn of new jobs replacing old.

It is these characteristics of the digital revolution that make human capital development different and more challenging than during the industrial revolution. Part of what has made industrialization such an effective catalyst for rapid economic growth is that farm work is reasonably transferrable to routine factory work. This transferability of knowledge is not inherently true for the jobs becoming increasingly prevalent in the digital world.

Premature de-industrialization poses an even more dramatic threat to developing countries. A world less reliant on cheap labor will hamper the ability of developing countries to pull citizens out of poverty. As the digital economy drives premature deindustrialization, these countries will face challenges similar to the developed world without the funding or institutions required to construct the programs needed to prepare their economy for the jobs of the future.

The level of education required combined with the need for constant retraining through an employee’s life poses a significant challenge to the status quo. This revolution not only demands a major upgrade to current training and educational programs, but it also poses a potential reality in which employees unable to keep pace with the retraining demanded by the market become unemployable. This revolution has the potential to create an environment where countries simultaneously suffer from unemployment and a shortage of talent to fill new jobs.

To avoid this future, it is critical to reorient our paradigms on education. First, we must look to the skills that will make for a competitive workforce and integrate the advancement of those skills into existing educational institutions. Second, we must begin to view education as a lifelong endeavor.

SKILLS IN A DIGITAL AGE — The Business-Higher Education Forum (BHEF) and Burning Glass Technologies partnered in 2018 to produce a study identifying the skills required of workers in the 21st century. Through analysis of over 56 million resumes and 150 million job postings dating back to 2007, the study identified 14 skills highly correlated to how competitive an employee is in the modern workforce.

Similar to Henry Sui’s findings on the growth of non-routine cognitive jobs, it is clear that the skills identified largely fall into areas where human beings still hold the upper hand relative to automated technologies.

Not only did researchers find that these skills increasingly dominate job postings, they also found these skills to be highly correlated to higher wages and upward mobility. Disturbingly the study also found a severe disconnect between the skills demanded by employers and the skills offered up by prospective employees.

DIGITAL SKILLS AND LIFETIME LEARNING — For employees to significantly differentiate themselves in an increasingly automated world, it will be important to gain skills less able to be replaced by technology. However, as technology continues progress, the areas in which human skill sets are superior to automated solutions will continue to evolve. This environment will require educational opportunities to be made available both in the traditional schooling system and later on as workers continue to adapt to changing job roles and responsibilities.

This paradigm shift will force the country to question norms around the availability of student financing, the composition of unemployment benefits, and the format long-term educational programs will necessitate.

Currently, student loans and scholarships are primarily made available to full time students seeking their first degree. As the need for constant education becomes more prevalent, additional financial resources must be made available to workforce participants. Financial resources alone will not be sufficient. Policy makers must also consider how benefits must be structured to better incentivize participation in and completion of retraining opportunities. Finally, the need for rapid retraining will require the educational system to shift its focus away from broad-based general knowledge and towards skill sets directly applicable to the modern workplace.

THE DISCONNECT BETWEEN EDUCATION AND WORK

Despite growing demand for cognitive, non-routine, digital skills, the BHEF Burning Glass study showed a clear disconnect between skills demanded and the competencies prospective employees reported when applying for work. Largely, students and educational institutions proved to be relatively blind to signals from employers as to which skills were demanded by new jobs hitting the market.

This problem, however, appears to be a two-way disconnect. While new entrants to the workforce come unprepared, employer involvement in incumbent employee skill development has continued to fall. Ultimately the effect of this disconnect has been severe skill shortages in emerging fields.

EARLY FAILURES AND LONG-TERM INDEBTEDNESS — It has been long established that degree earners make more over the course of their lifetime when compared to those without a secondary education. This reality has become sharply more pronounced in recent decades. OECD research shows that globally the education and skills profile required of middle-class workers has increased substantially. Its research shows that compared to twenty years ago the percentage of middle-income jobs existing in high-skill occupations has risen from nearly one-third to one-half. As a result, the report shows that the number of workers in middle-income, middle-skill jobs has declined in nearly all countries.

Given this information, it is unsurprising that the number of jobs requiring advanced degrees is anticipated to constitute a much larger proportion of the US labor market in the coming years. Researchers from Harvard Business School identify this trend as “degree inflation” and assert:

“the rising demand for a four-year college degree for jobs that previously did not require one — is a substantive and widespread phenomenon that is making the U.S. labor market more inefficient.”

While these trends seem to indicate the need to push more workers towards obtaining advanced degrees, such a conclusion ignores a more significant underlying cause, the growing disparity between the attainment of education and the translation of education to meaningful employment.

The trend toward degree inflation is in part driven by a mistrust in the skills students acquire following the traditional educational system. Failures to equip students with relevant skills, accompanied by inconsistencies in the quality of education across the country, means employers hedge their bets by requiring higher educational attainment.

The issue boils down to the reality that, despite its significant capital reserves and well-developed institutions, the education and training programs in the United States do not appear to be up to the task of training the workers of the future. The norms of the US educational system still reflect the age in which the country industrialized. While the United States still values a broad education and maintains an aversion to skill-based tracking, many industrializing countries have shifted to models that more effectively respond to signals from employers. This method of education addresses the need to more effectively deliver targeted education.

Skills-based tracking systems employed in primary education enable students to sort into areas of specialization that prepare them with the skills required to enter the job market or pursue their intended area of secondary education. Despite the slow rate of educational reform, the concept of skill-based training continues to garner significant support among voters. Within the United States 82% of voters express a desire to see job and career classes offered during primary education, and 86% describe wanting to see to see certification and licensing programs made available to high school students.

The lack of connection between education and employment is further aggravated by a lack of career counseling during secondary education. This has shown to be especially true at for-profit colleges. For many students this can result in a number of years navigating the educational system rather than productively gaining employment. Without proper counseling, many students get lost in the prerequisite path required to graduate within the number of years traditionally.

A lack of proper counseling also results in a degree of information asymmetry that makes it difficult for high school students to identify target schools and majors. Few 18-year-olds have a firm grasp on the unmet skill demands existing in the economy, the earning potential of different careers, or the total costs associated with a specific educational institution and degree program. Further, when identifying target schools, most high school students do not think to research the employers that typically recruit from specific universities. This lack of knowledge can have a significant impact on after-school employment and earning.

Ultimately, the failure to equip students with skills relevant to modern jobs has serious long-term economic consequences. Failure of this kind is especially concerning in the face of growing college debt levels. In terms of earning potential, bachelor’s degrees continue to replace high school degrees while graduate degrees replace bachelor’s degrees. As college tuition increases outstrip wage growth and inflation, the heightened earning potential of college degrees proves out of reach for less financially stable workers or requires a debt burden that will follow them into their working career.

FAILURES IN INCUMBENT WORKER DEVELOPMENT — Compounding failures to properly train workers within the traditional educational system, is the modern-day reality that employers are taking a substantially less active role in the development of their workforce relative to companies of the past. This reality has a concerning impact on the earning potential and financial wellbeing of employees dislocated due to automation.

In his research on the impact of automation on the Dutch workforce, James Bessen of Boston University showed that incumbent workers in firms that automate tend to see long term reductions in their wages. At the same time, new hires entering companies directly prior the automation event tended to be more highly skilled with no reduction in their wages after the automation event.

Despite the clear consequences to the economy, the trend towards lower employer involvement in workforce retraining is not altogether surprising. The rise of increased worker mobility has done a great deal to shift employer incentives towards “buying” rather than “building” a workforce. Due to the growth of online recruiting tools and the movement of jobs towards densely populated cities, the employee-employer relationship has become increasingly temporary.

In this environment employers have fewer tools to compensate for the investment made in an employee. In a world where tenure is not guaranteed, employers must recoup their investment by paying the employee less than market value after their education is obtained. However, doing so nearly guarantees the employee will leave to a competing firm willing to pay market value. The competing firm ends up better off because they did not need to pay for the employee’s training. As a result, employers are not motivated to pay for training in skills widely applicable to the labor market.

LABOR MOBILITY IN A RAPIDLY SHIFTING ENVIRONMENT

A key assumption of efficient markets is that of mobility. The idea assumes that production will move to the location where goods and services will be produced most efficiently, and that workers will move to the location where their skills are most highly valued. In a globalized world we observe supply chains becoming increasingly mobile whilst labor becomes increasingly less so. US workers in 1948 were labeled as the most mobile in the world with nearly 20% of the population having relocated within the last 12 months. This rate has experienced a severe drop off starting in the 1980’s with the most dramatic decreases beginning in 2000.

The lessening of labor mobility has had serious consequences to the American economy. We observe companies facing labor shortages while poverty is becoming more concentrated in specific geographic regions. When jobs relocate, immobile workers are often forced to switch to industries where their skills are less highly valued and, as a consequence, they are often paid less. This is at least in part driving the record low wage growth in the United States, averaging around 0.2% annually since 1973. This is particularly concerning for the lower quintile of paid workers as their wage growth has been negative while the top quintile of income earners have seen wages rise by 27%. This has contributed to the United States having the one of the highest rates of “working poor” among countries in the Organization for Economic Cooperation and Development (OECD), beating only Greece and Spain.

Undoubtably, some external forces driving worker immobility will be difficult or impossible to address. In part, worker immobility has been driven by workers needing to stay local to take care of aging relatives. The rise of two income households has also made job mobility more difficult. Furthermore, foreign outsourcing and tightening immigration laws have made it difficult for workers to adjust in a globalizing world. Rectifying this issue will require policy makers to identify the underlying and addressable causes of worker immobility.

OCCUPATIONAL LICENSING RESTRICTIONS AND PROFESSIONAL PREREQUISITES — In today’s business world nearly 1 in 4 workers require a license to do their job. This number is has risen substantially from 1950 where the number was 1 in 20. Licensing has become a major industry in the United States increasing both the cost and time required of employees to enter new fields of work. Because licensing is legally compulsory for workers who wish to perform in a given field, licensing organizations are given substantial pricing power in the cost of programs and tests they administer.

Driven by the increase in worker licensure requirements, we have observed a growing disparity between licensing requirements across state lines. These disparities often mean workers have to pass new licensure requirements if they wish to work in a different state. Compounding the issue is a similar disparity in the transferability of education requirements necessary to enter graduate programs or to sit for licensure tests.

INFLEXIBLE HIRING PRACTICES — Non-compete agreements are another rising source of worker immobility. Across the economy as a whole 18% of workers operate under non-compete agreements while nearly 40% will have worked under a non-compete agreement at some point in their careers. This phenomenon is not exclusive to workers in high skill professional jobs. Roughly 14% of workers without college degrees and 15% of workers earning less than $40,000 a year have non-compete agreements with their employers. More than 70,000 fast food restaurants in the United States operate with employee non-compete agreements. Such agreements limit mobility within local geographic regions reducing employee negotiating power.

HIGHER HOUSING COSTS — The trend of high skill jobs moving to concentrated geographic areas presents an indirect consequence of higher housing costs pushing out lower paid workers. As was discussed in part two of this series, a lack of transportation and affordable housing can cause labor shortages or significant reductions in labor productivity due to long commuting times.

This trend of rising housing costs is indicative of the divergence between the upper and lower class. Gentrification and the transition of historically less expensive neighborhoods into more expensive neighborhoods puts regions of opportunity out of reach for middle to low income workers.

Immobility due to rising home prices represents a major drag to the US economy. Chang-Tai Hsieh and Enrico Moretti’s 2017 working paper estimated that misallocation of workers between high and low productivity areas has lowered aggregate GDP by more than 50% between 1964 to 2009. The paper cites “stringent restrictions to housing supply” as a major cause of spatial misallocation.

Similar to zoning and land use restrictions, insufficient attention given to low income housing regulation and subsidies have further exacerbated the movement of workers to areas of greater opportunity.

RIGIDITY OF UNEMPLOYMENT BENEFITS — The past two decades have brought significant changes in the unemployment experience. To this point unemployment benefits appear to have lagged behind changes that will significantly impact the productivity of the country’s labor force for years to come. Furthermore, federal funding for retraining dislocated workers has remained largely unchanged while funding for adult education has suffered significant cuts.

An inability to qualify for and access unemployment benefits can prove detrimental to employees wishing to retrain and reorient their career towards a new industry. Under the current system, unemployed workers can face a series of hurdles when seeking out new employment. Many workers who existed in a traditional employer-employee relationship face significant issues when attempting to prove they were laid off without cause. This struggle ultimately limits their access to unemployment benefits. Additionally, in current state, eligibility rules for unemployment benefits state that a worker must be actively seeking full-time employment. This stipulation limits the ability of unemployed people to start their own business or seek part-time work in situations where full-time positions are not available.

Even for workers able to qualify for unemployment benefits, the duration of benefits can pose serious issues to retraining and education efforts. This hurdle, compounded by the lack of financing options for adult education, can result in dislocated workers taking lower paid jobs as they struggle to obtain skills relevant to emerging industries.

The rise of contract and temporary workers makes this issue even more complicated. Workers with non-traditional employer relationships now make up 16% of the US workforce. For many of these people, unemployment benefits are often not a possibility, putting the cost of retraining out of reach.

INCONSISTANT WORKER BENEFITS — The lack of standardization of employer-provided benefits can also serve as a headwind for workers wishing to change jobs. Specifically, the inconsistency of healthcare benefits across firms can pose as a significant concern to employees with ongoing medical conditions. Smaller firms, with less diversified worker risk pools, generally have higher premiums further discouraging prospective employees. Similarly, inconsistencies in state-level standards for Medicaid access and mandatory coverage of medical services can deter new workers from moving across state lines to pursue better opportunities.

Furthermore, the general lack of benefits made available to temporary, part-time, and contract workers poses a barrier to employees who would otherwise seek employment in careers with non-traditional employee-employer relationships. This inherently discourages entrepreneurship and participation in the gig economy.

Johnathan Gruber, the MIT economist that worked on Romneycare, describes the resulting insurance-induced worker immobility as “job-lock.” He describes the reality that employees may not move to opportunities where they are most productive due to concerns over the availability and quality of health insurance. He cites a study on “job-lock” from 1994, that found insurance induced reductions in worker mobility to be around 25%.

THE WORK AHEAD

For the United States to effectively compete in a global digitizing world, it is evident that it will need to set out a strategic investment strategy focused on human capital development. Curriculums must be reoriented towards digital learning. Educational systems must establish better feedback channels between employees and students while adapting to a world of lifetime learning. At the same time, policy makers must turn their attention to increasing worker mobility.