Unemployment, Structural Change and Globalization

M. Pianta and M. Vivarelli

UNEMPLOYMENT, LEARNING AND TRAINING
M. Vivarelli

The present pace of technical change appears to be faster and more "biased" than in the past , both in quantitative terms (the labour-saving bias, see Unemployment and Technical Change) and in qualitative terms ( the skill-bias, see Unemployment and the Skill Bias). In this context, modern economies need to be "learning economies" where skills and competencies have to be continuously up-dated. In particular, the transmission of traditional and new forms of knowledge should be the focus of the education and training system of a competitive economy aiming at full employment.

In more detail, the diffusion of the Information and Communication Technologies (ICT) is at present the most striking feature of the development processes which characterise the advanced and new industrialised countries (about the pervasiveness of ICT diffusion in the Asian NIC’s and their implications for employment, see Freeman-Soete-Efendioglu, 1995).

In other entries (Unemployment and Technical Change, Unemployment and the Skill Bias, Unemployment and the Sectoral Composition of the Economy) the impact of ICT on unemployment and employment composition has been diffusely discussed. The aim of this entry is more policy oriented and the focus is moved on the institutional settings which can provide a better way to deal with present transformations. More specifically, the thesis is that social imbalances (from social exclusion to technological unemployment and the marginalization of the unskilled) can be limited only if "learning" becomes one of the main asset of a given social and institutional setting. In this context, education and training assume a paramount importance .

The next section will try to deal with the concept of a "learning economy" and will be mainly based on the works of Bengt-Ake Lundvall (Aalborg University - Denmark). Section 3 will discuss the economic theory on training and will offer some empirical evidence and examples about the need of training in the present time . While the entry "Unemployment and the Skill Bias" offers unambiguous empirical evidence about the crucial role of education in lowering the likeliness of unemployment and in improving earnings (tables 2-3-4), for reasons of space education will not treated in detail in this entry.

2. The "learning economy".

In order to deal with the role of "knowledge" in modern societies, a proper theoretical starting point is the framework elaborated by Bengt-Ake Lundvall (professor at Aalborg University - DK and former OECD economic advisor) and particularly his concept of "learning economy".

In Lundvall’s studies, structural and technological change are seen as social processes where individual and organisational learning is the engine of technological diffusion and economic growth. Technological diffusion and learning can be facilitated by "organised markets" where transactions are not entirely driven by market forces, but can be regulated by vertical integration, public intervention and government demand (see Lundvall, 1988 and 1992).

Within this framework, the access to the new knowledge (which is sometimes codified and sometimes tacit) is a crucial asset for an individual (worker), an organisation (firm) or even an entire national economic system (globalization and international division of labour, see Lundvall, B.A. - Johnson, B., 1994). In this context, an unequal distribution of knowledge resources and learning opportunities can lead to social fragmentation (named by Lundvall "Intellectual Tribalism" , joking on the acronym IT for "Information Technologies") and social exclusion of individuals (unemployment in the EU, "working poors" and "under class" in the US): "The economy is becoming a hierarchy of networks with some global networks at the top and an increasing proportion of social exclusion at the bottom of the pyramid." (Lundvall, B.A., 1995, p.2).

Since technical change has favoured the productivity of skilled rather than unskilled labour (see Unemployment and the Skill Bias) and job creation has been taken place in the knowledge-intensive parts of the economy (see Freeman, C. - Soete, L., 1994, chap. 3.4), knowledge and learning has become more and more important in determining the economic fate of individuals, firms and national economies: "According to standard economics, the major policy response to the polarisation of job opportunities should be to make sure that wages were flexible downwards. But in the US this kind of flexibility has resulted in a growing proportion of ‘working poor’, while in the UK the increased wage differences imposed by Thatcherite policies have gone hand in hand with an even stronger polarisation than before in terms of job opportunities."(ibid., p.9).

From an economic policy perspective: "One alternative is, paradoxically, to speed up further the rate of learning in the sectors facing international competition in order to obtain a bigger share in the most rapidly growing markets. Another is to create a sheltered sector where learning takes place at a slower rate. A third, and perhaps the most important, is to redistribute the access to information networks and the capabilities to learn in favour of the potentially excluded." (ibid., p.13).

In this framework, inequality and social exclusion are the consequences of lower endowments both in terms of wealth/income and knowledge. Indeed the social exclusion, which has its roots in the unemployment and then develops into poverty, criminality, social riots and so on, is the final outcome of a "vicious circle" where initial disadvantages in terms of family endowments (on this aspect see also Rawls, 1971 and Sen, 1973, 1997a and 1997b) imply lower learning opportunities which in turn involve lower access to new knowledge and so lower probability to get a job. Thus it could be detected a causative chain starting from economic inequality , evolving in fewer and poorer knowledge assets and ending in unemployment and social exclusion. In addition, without a proper skill and knowledge updating through training, unemployment can implies hysteresis, that is long-term unemployment and further knowledge obsolescence.

How to avoid these perverse circles? It is obvious that vocational training for young people and training and re-training for workers are necessary. Yet, in the ICT era the issue is quite more complex than before. At least three important questions can be singled out.

1. In the ICT era, it is necessary to choose between a "high road" and a "low road" in coping with global competition. While the high road implies R&D efforts, product innovation and the up-skilling of the labour force, the low road involves lower wages, labour flexibility, lower labour standards (see Unemployment and Wages and Unemployment and the Labour Market). In this context, providing an adequate training system can be considered a strategic choice in terms of long-term development policy: "To achieve these other types of organisational and skill flexibility is far more difficult than to achieve traditional labour supply flexibility; the change in skill composition which is needed for the ICT paradigm is probably greater than for any other technological revolution. However, the alternative to competing in high-skill, high value-added types of manufacturing and service activities is to compete in low-skill or unskilled labour with countries which have far lower wage rates and longer hours of work" (Freeman, C. - Soete, L., 1994, p.98-100).

2. It is crucial to provide that kind of training which is really needed and to avoid mismatches between new skill requirements and the supply of training (both inside and outside the firms). Indeed, most of international and national institutions and policy makers agree about the need for training (see for instance the generic policy recommendations in OECD, 1996, chap. 6), but the difficulty is to translate general auspices into effective training plans. In fact, it is often the case that both private and public training is not up-dated and so it does not really improve the match between the demand for labour and the labour supply. Two strategies for improving the effectiveness of training can be proposed:

1. the diffusion of evaluation processes in terms of employability and skill up-grading;

2. the formation of tripartite institutions where employer associations (demand for labour), unions (labour supply) and public authorities (training planning) jointly make their decisions based on a proper monitoring of the (local) labour market.

3. Notwithstanding the formal public announcements and the apparent consensus about the need of training, up-dated and useful training cannot be a "free lunch" and a large amount of resources is needed. This raises the question of the government budget constraints (is the financing of the "learning economy" compatible with the budget discipline?) and the bigger issue of income distribution; in Rawlsian terms: are the advantaged citizens ready to pay in favour of the training of the disadvantaged ones in order to avoid mass unemployment and preserve social cohesion? It is obvious that these are very "hot" political issues, yet a serious approach to the topic cannot avoid to raise them.

The following section will not be able to answer these important questions but will try to clarify some theoretical issues which are important in designing training policies.

3. Training: the economic debate.

Training is one of the so-called Active Labour Market Policies (ALMP), that is policy measures the purpose of which is to increase the chances of maintaining or getting a job (employability) rather than to provide income support to the unemployed (passive labour market policies). Like other ALMP (subsidies in favour of firms in order to stimulate hiring; direct job creation by the state (workfare); public employment services (PES) aiming to the matching of demand and supply in the labour market), the supply of training has to take into account benefits, trade-offs and also possible adverse counter-effects.

The need for providing formal training activities supplied either by the firms or by a public authority (directly or in the forms of subsidies ) emerges as a consequence of different forms of market failures. In fact, in absence of these market failures, both firms and workers should spontaneously converge to the optimal level of training able to completely adjust the supply of skills to its demand (see Becker, 1962). Instead, in the real world, various forms of market failures can be singled out:

1. Firstly, general training, which can be exploited by all employers, and specific training, which is useful only to a specific employer, are not always separable. If such is the case, an employer can be reluctant to afford the costs of training activities which can benefit other firms. If this "appropriability problem" arises, under-provision of training becomes very likely.

2. If a portion of the training activities are transferable, firms are subject to the risk of "poaching": competitors can develop the strategy "to steal" trained workers from those firms which provide training. If such is the case, a "free riding" problem emerges: each firm wait for another firm to provide costly training activities, but all firms embrace the same strategy and so no one engages training activities. Also in this case under-supply (or even no supply) of training is extremely likely (see Stevens, 1996).

3. From the worker’s point of view, scepticism about self-financed training courses can arise because of scarcity of skilled vacancies. This situation can be determined by a vicious circle: on the one hand, firms have little incentive to create good jobs because of a given skill shortage which makes it difficult to fill them; on the other hand, with few good job tasks available, workers have a very little incentive to acquire skills (it is the so-called "low-skill, bad-job trap", see Snower, 1996 and ILO, 1996, pp. 100-101). This perverse mechanism can lead to a structural adjustment focused on low-technology sectors (see Unemployment and the Sectoral Composition of the Economy); this risk is particularly high in developing countries.

4. In presence of a "skilled bias technical change" (see Unemployment and the Skill Bias), another vicious circle can occur: firms can tend to under-innovate because the lack of skilled workforce, while worker are reluctant to train because there is insufficient demand for them from the (few) innovative firms (see Ulph, 1996).

In this context, market failures can be overcome by the government through the direct provision of training activities. Another way to intervene is to give subsidies and proper incentives to the private provision of skills. In the latter case, a pre-condition is that both the firm and the employee are committed to a long-term relationship: in this situation the employer does not fear poaching and has a strong interest to train its stable workforce, while the employee is more motivated to learn since its present job is of a permanent nature ( about the trade-off between labour market flexibility and an efficient provision of training, see Unemployment and the Labour Market, Section 3, Point 2). This thesis is well expressed in Freeman and Soete (1994). According to them, ICT diffusion requires organisational and skill flexibility, in order to overcome the "mismatch" on the labour market. Instead of insisting on wage flexibility, economists should stress the need for training and organisational changes. In this view, a rather "vertebrate economy" (where employers and employees are embedded in long-term commitments) could perform better than a pure market economy where excessive contract volatility makes not workable for individuals to invest in education, training and the acquisition of new skills (see Freeman-Soete, 1994, pp. 106 and ff. and chap. 7).

If these are the main arguments to support the need for an active training policy, there are also some difficulties and trade-offs which have to be taken into account:

1. Sometimes, training programmes provided by central or local authorities are ill suited to firms’ needs. Indeed, employers’ skill requirements are often idiosyncratic and it is virtually impossible to fully know them in advance; in this context, some authors suggest state finance (subsidies), without state direct provision, of training (see Booth and Snower, 1996b, p.11). However, the full privatisation of training activities opens the way to the risk of short-terminism and opportunism by the subsided firms.

2. Public training can also be affected by bureaucratisation and short-terminism like any other policy measure which can be related to the "political cycle" (the measures are implemented according to electoral reasons and not as the outcome of a proper analysis of the national or local labour market; see Keep-Meyhew, 1988 and Senker, 1989).

3. In some circumstances, the impact of training activities can be quite lower than what was expected. For instance workers - especially long-term unemployed people - can be reluctant to learn. Moreover, given a fast skilled-biased technical progress, the shift in the demand for skilled labour can be characterised by a faster pace than the pace at which skill provision can be adjusted through training.

In summary, there are pros and cons in the provision of training and so it is very important to collect data and evaluation materials. Unfortunately, the empirical evidence on training is rather scarce and fragmented. On the one hand, there are some studies which underline the need for training as the main way to deal with technological transformations. On the other hand, there is some empirical evidence and evaluation material which cast some doubts about the degree of usefulness of training programmes.

As far as the need of training due to technological change, in their econometric estimates Baldwin, - Diverty,- Johnson (1995), have found that the introduction of ICT technologies in firms’ organisation increases the skill requirements in 44-46 cases out of one hundred, and that firms using ICT technologies are more likely to train; (ibid., table 6, p.36). In addition, survey results point out that technology adoption creates a need for more training: between 2/3 and 3/4 of technology-using firms have reported that the adoption of new technologies has increased their education and training costs (ibid., table 7, p.37). Finally, Johnson - Baldwin - Diverty (1996), found out that training is more useful where expertise in innovation and quality management already exist.

Indeed, while there is a general consensus about the increasing need for training, the empirical evidence about the usefulness of actual training programmes is quite more controversial. In more detail, problems arise about the high non-completion rate (a high percentage of the trainees leave before completing their training programme), the critical assessments of participants, the scepticism of employers (a small number of those completing training courses find work).

At any rate, it is important to note that evaluation schemes have concentrated upon the direct impact for participants and few research has been devoted to possible positive side-effects (in terms of general knowledge, slower skill obsolescence, self-confidence and so on). In addition, available evidence is quite scattered and inconclusive and generally provided by an international institution (the OECD) which has always been very sceptical about training activities. However, the empirical material collected by the OECD provides some support to the idea that a pre-determined orientation towards the needs of employers and the preference for very specific and tailored schemes can both increase the likelihood to get better results in terms of trainees’ motivation and job placement (see Fay, 1996 and OECD, 1993, particularly pp. 56 and ff.).

On the whole, the available empirical evidence does not allow to draw unambiguous conclusions. On the one hand, the present forms of technical change require additional training and probably a different type of training. On the other hand, training courses have to be carefully monitored and evaluated in order to avoid misplacement and waste. Yet, the discussion (both at the local and at the national and international level) is heavily influenced by political opinions and partisan interests. In this context, in turn the employers, the unions and the public authorities pretend to exactly know what is needed in terms of training. Instead, it would be useful to create tripartite institutions devoted to the monitoring of the labour market, to the information diffusion and finally to designing up-dated and useful training programmes.

As discussed in the previous section, the empirical evidence available on training is quite feeble. On the one hand, the OECD has collected the assessments reports of some training schemes in different OECD countries and has tried to put forward some taxonomies and to draw general policy recommendations (see OECD, 1993 and 1997a, Fay, 1996). However, these analyses are necessarily partial and they are not quantitative in nature (different discursive assessments are compared in synoptic tables).

As far as quantitative studies are concerned, in OECD (1993, pp. 48 and ff.) one can find an econometric attempt to measure the impact of training on employment opportunities: the econometric exercise finds that an increase of 100% of training public expenditure leads to an increase of 37% of the employment intensity of GDP growth. However, it has to be underlined that this is a very tentative and challenging econometric exercise.

Some descriptive statistical evidence is instead available in terms of international comparisons of training expenses and training participation rates. The following tables report this kind of evidence.

Table 1: Public expenditure and participant inflows in public training programmes in main OECD countries (source: OECD, 1993).

As it can be noted, table 1 confirms the well-known leadership of German Landers in providing public training, while all the other countries - with the partial exceptions of France and Canada - are lagging behind. It is interesting to see that differences in terms of trainees are less striking than in terms of expenditure; this means that the countries leading the ranking devote more resources to longer and more complex courses rather than to reach more workers.

Table 2: Participation rates in job-related public and private continuing education and training by employed 25-64 year-olds, (source: OECD, 1997b)

In these surveys, the results of which are reported in table 2, employed workers are directly asked about any form of training (public and private) received in the indicated preceding period. As it can be seen, Nordic countries are now leading the ranking and the UK and the USA are now comparable with Central European countries. Instead, in this table, it emerges the very bad position of Southern European Countries.

Table 3: Participation rates in job-related public and private continuing education and training by unemployed 25-64 year-olds, (source: OECD, 1997b)

With the exception of Belgium and Denmark, in all countries the condition of being unemployed decreases the probability to be involved in training. Having said that, the ranking of countries results relatively stable.

Table 4: Participation rates in job-related public and private continuing education and training (some time during the 12-month period preceding the survey) by employment status, percentage of the 25-64 year-olds, (source: OECD, 1997a)

Most of previous considerations apply to this synoptic table 4. However, it is important to notice the advanced position of French training system (French data were not available in the previous tables).

Table 5: Percentage of 16-19 year-olds who are in both education/training and employment, (source: OECD, 1997a)

In table 5 data are reffered to that particular form of training which facilitates the exit from the school system into the labour market. Unfortunately, the German data, which would reflect the diffusion of the "dual system", are not available. However, other Central European countries, Canada and Australia show high and increasing percentages. In the US about 20% of students are involved in these training activities, while in all the other countries the phenomenon is not very important (again, Latin Southern European countries seem to be particularly disadvantaged).

References

* The concept of "learning economy" (see Section 2) has been put forward by Bengt Ake Lundvall as a development of a theoretical framework aiming to design the main features of the so-called "national system of innovation", that is the institutional setting through which a given socio-economic system provides, diffuses and uses innovation (the main scholars of this topic are Christopher Freeman, Richard Nelson and Lundvall himself). It is especially in Lundvall (1995) that the reader can find a deeper analysis of unemployment and social exclusion as an effect of lack of knowledge and learning opportunities.

Lundvall, B.A. (1988), Innovation as an Interactive Process: From User-Producer Interaction to the National System of Innovation, in Dosi, G. - Freeman, C. - Nelson, R. - Silverberg, G. - Soete, L. (eds.), Technical Change and Economic Theory, Pinter, London.

Lundvall, B.A. (1992) (ed.), National Systems of Innovation: Towards a Theory of Innovation and Interactive Learning, Pinter, London.

Lundvall, B.A. (1995), The Learning Economy - Challenges to Economic Theory and Policy, paper presented at EAEPE- Conference, Copenhagen, October 27-29, 1994 (revised version)

Lundvall, B.A. - Johnson, B. (1994), The Learning Economy, Journal of Industry Studies, vol.1, n.2, pp.23-42.

* The issue of social inequality and its related welfare trade-offs is of great importance and it can be considered as a background of the analysis presented in Section 2. Yet, it was impossible here to deal properly with this important topic; for the interested reader, the starting points could be the following studies:

Rawls, , J. (1971), A Theory of Justice, Harvard University Press, Cambridge (Mass.).

Sen, A. (1973), On Economic Inequality, Clarendon Press, Oxford.

Sen, A. (1997a), On Economic Inequality, enlarged edition, Clarendon Press, Oxford.

Sen, A. (1997b), Inequality, Unemployment and Contemporary Europe, International Labour Review, vol. 136, pp. 155-172.

* The following contributions are focused on the economics of training. The main purpose is to single out trade-offs and problems which can arise in the provision of training and in designing a proper structure of incentives in order to overcome a tendency towards the under-supply of training activities. While the first author is very confident in the spontaneous formation of a market of training, the others point out market failures and trade-offs which allow a public intervention in the field.

Becker, G:S (1962), Investment in human Capital: A Theoretical Analysis, Journal of Political Economy, vol.70, supp., pp. 9-49.

Keep, E. - Meyhew, K. (1988), The Assessment: Education, Training and Economic Performance, Oxford Review of Economic Policy, vol.4(3), pp. I-XV.

Senker, P. (1989), Technical Change, Work Organisation and Training: Some Issues Relating to the Role of Market Forces, New Technology, Work and Employment, vol. 4(1), pp. 46-53.

Booth, A.L. - Snower, D.J. (1996a), Acquiring Skills: Market Failures, Their Symptoms and Policy Responses, Cambridge University Press, Cambridge.

Booth, A.L. - Snower, D.J. (1996b), Introduction: Does the Free Market Produce Enough Skills? in Booth, A.L. - Snower, D.J., Acquiring Skills: Market Failures, Their Symptoms and Policy Responses, Cambridge University Press, Cambridge, pp. 1-16.

Snower, D.J. (1996), The Low-skill, Bad-job Trap, in Booth, A.L. - Snower, D.J., Acquiring Skills: Market Failures, Their Symptoms and Policy Responses, Cambridge University Press, Cambridge, pp.109-124.

Stevens, M. (1996), Transferable Training and Poaching Externalities, in Booth, A.L. - Snower, D.J., Acquiring Skills: Market Failures, Their Symptoms and Policy Responses, Cambridge University Press, Cambridge, pp.19-40.

Ulph, D. (1996), Dynamic Competition for Market Share and the Failure of the Market for Skilled Labour, in Booth, A.L. - Snower, D.J., Acquiring Skills: Market Failures, Their Symptoms and Policy Responses, Cambridge University Press, Cambridge, pp.81-107.

ILO, (1996), World Employment 1996/97: National Policies in a Global Context, International Labour Office, Geneva.

* More empirically oriented, the following studies underline the role of training in coping with the ICT diffusion:

Baldwin, J.R. - Diverty, B. - Johnson, J. (1995), Success, Innovation, Technology, and Human Resource Strategies - An Interactive System, paper presented at the conference on "The Effects of Technology and Innovation on Firm Performance and Employment", Washington, May 1 and 2, 1995.

Johnson, J., Baldwin, J.R. - Diverty, B. - (1996), The Implication of Innovation for Human Resource Strategies, Futures, vol.28, pp.103-119.

Freeman, C. - Soete, L. (1994), Work for All or Mass Unemployment, Pinter, London.

Freeman-Soete-Efendioglu, 1995, Diffusion and the Employment Effects of Information and Communication Technology, International Labour Review, vol. 134, pp. 587-603.

OECD (1996), Technology and Industrial Performance, OECD, Paris.

* The following OECD publications focus on the international comparisons of the (few) data concerning the expenses and participants in training programmes and the evaluation schemes of actual training courses:

OECD, (1993), Employment Outlook, OECD, Paris (pp. 39-80).

Fay, R.G., (1996), Enhancing the Effectiveness of Active Labour Market Policies: Evidence from Programme Evaluations in OECD Countries, OECD Labour Market and Social Policy Occasional Papers, n.18, OECD, Paris.

OECD, (1997a), Lifelong Learning to Maintain Employability, DEELSA/ELSA/MIN(97)4, OECD, Paris.

OECD, (1997b), Education at a Glance: OECD Indicators 1997, OECD, Paris.

OECD, (1997c), Education, Policy, Analysis, OECD, Paris.