Why it pays off to invest in your workforce
- Despite widespread skills shortages and gaps observed in the Arab World, training rates are generally lower as compared to developed knowledge economies
- In cases of market failure which deter workforce investment, joint approaches that share the responsibility of skills development between government and business have been effective
Tahseen Consulting is honored to have its work on skills gaps in the Arab World cited by the Gulf News. We have posted a snippet from the article below. You can also read the full article here. While we agree that more occupation-specific assessments and certifications are needed, there are likely larger employer-level interventions required before such initiatives can really have an impact. We view increasing the resources regional firms devote to workforce investment and development as systemic problems that must be addressed first.
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Workforce Investment
While firms tend to focus on paying higher wages for highly demanded skills, macroeconomic trends and rampant market failures of education and training systems suggest longer term approaches to skills formation through continuous, regular on the job training and knowledge transfer are needed (Hall & Lansbury, 2006). Market failures in human capital formation are rampant as education and training institutions struggle to keep pace with economic growth (Lall, 1999). The workforce investment mandate of employers in the 21st century has expanded to include not only training in response to high-performance workplace organization and maintaining skills relevancy in light of competitiveness, but it now also includes the burden of remediating inadequate pre-employment general skills formation due to formal education and training system market and institutional failures.
Despite widespread skills shortages and gaps observed in the Arab World, training rates are generally lower as compared to developed knowledge economies with more effective skills formation systems as well as other developing economies such as Brazil, China, and Russia (World Bank, 2010).
Lall (1999) suggests that basic skills, personal attitudes, and competencies developed through formal education and training must be complemented with specific technology-based experience to develop technical skills. Industrial sophistication and competitiveness are derived not from formal education and training but the “practical experience of mastering, adapting, and improving specific technologies” (Lall, 2000, p. 22).
Industrialization and skill accumulation are achieved by expansion of the education system alongside the upgrading of the skill intensity of economic activities.
For developing countries, this approach reduces the technology gap with advanced countries while raising the demand for higher levels of human capital and concurrently providing the education and training required for economic development (Mayer, 2000). To avoid insufficient individual incentives to engage in skill upgrading, improved performance and productivity gains from skills acquisition are linked with pay when firms exercise wage flexibility (Ashton & Sung, 2002).
The willingness and ability of firms to provide enterprise-based training is rooted in a number of factors. The educational attainment of the workforce and firm managers can serve to reduce investments in firm-level training.
Low levels of education amongst a firm’s workforce can raise doubts surrounding the absorption capacity of training while managers with lower levels of education may not perceive a value in providing training.
Managerial calculations of the returns to training may be further complicated by informational gaps surrounding technology, future skill requirements, and benefits of training (Lall, 1999). Firms which operate in less competitive, low skill production economies in which short-term strategic planning, little technological upgrading, low rates of capital spending, and an unfavorable economic policy environment for growth are rampant may prevent structured firm-based training.
Lack of internal capacity to provide training can obligate firms to rely upon external private training provision.
In cases where the external training sector is underdeveloped and firm sizes are generally small, the inability to achieve scale to minimize training costs and budgetary constraints can serve to reduce the prevalence of firm-based training (Lall, 2000; Ziderman, 2003). This situation is particularly applicable in the Arab World where firm sizes are comparatively small relative to other regions (Schwalje, 2013c). Employee poaching, the tendency of firms to recruit employees with transferrable skills from other firms, may serve to limit firm-based training since training firms incur the cost of employee training only to lose the employee and resulting benefits of the training to another firm. In an environment with high levels of poaching, training firms will reduce training or only offer highly, specific training that is not transferrable to other firms (Acemoglu & Pischke, 1998).
Due to the variety of causes of inadequate enterprise training, policy solutions must be tailored to the root cause.
In cases of market failure which deter workforce investment, joint approaches that share the responsibility of skills development between government and business have been effective. Training subsidies allow companies to develop training capacity, but more sustainable, longer-term approaches such as government provided training advisory and technical assistance funded through national training funds and levy-grant schemes are preferred. A notable initiative of this type is the Waqf Fund in Bahrain which trains employees for the Islamic banking sector based on contributions from private financial institutions which are invested in money market instruments and the returns invested in training initiatives. The Human Resources development Fund in Saudi Arabia also works in a similar way.
Where the private training sector is weak, the government may fulfill a transitional role to build the capacity of private training providers complemented with public sector provided training.
Payroll levy-grant schemes which do not require government financing are effective in limiting poaching. Under such schemes, firms which provide training receive subsidies to fund training initiatives while firms that do not train do not have access to funds since they are more likely to poach employees (Ziderman, 2003).
Jacobs (2002) identifies workforce development as the cooperation of education and training institutions, the business community, and governments to provide individuals with rewarding employment as well as firms obtaining skills in the quantity and quality they require. High youth unemployment rates and market failures of education and training systems to create general skills suggest an expanded role for the Arab business community towards ensuring alignment between the skills imparted in formal education and training systems and those demanded in the workplace. Apprenticeships or work experience, often compensated at below the market wage rate, in which work experience is integrated into the formal educational structure and classroom learning can ease the school-to-work transition and ensure employability of young graduates (Quintini et al., 2007).
Including employers in curricula design, identifying the skill sets needed by graduates, standards setting, and accreditation can ensure education and training systems evolve alongside changing labor market needs.
Through membership in industrial trade associations, businesses can also serve a governance role in the skills formation system (Ackroyd, Batt, Thompson, & Tolbert, 2005). However, in developing countries the oversight role typically played by scholarly, scientific, and professional organizations may be limited due to lack of capacity. Workforce development ensures that the relevance and employability mandate of education and training systems is fulfilled by minimizing informational asymmetries which reduce individual investment in skills acquisition. Early employer involvement in articulating future skills needs also serves to reduce the need for workforce training investment to backfill general skill deficiencies resulting from poor quality education and training systems.
