This month, we take a look at two new research reports that analyse skill development and technological change from a human capital approach. The first paper was co-written by Professor Jin Young Kim, Korea University and Deputy Chief Economist, Cyn-Young Park for the Asian Development Bank (ADB). It links biological decline as humans age to the value of their skills in the modern workplace and addresses the impact on national productivity. This key report frames skill development as an essential public, private and personal investment that will ensure workers can retain employment throughout their longer working lives and adapt to the rapid depreciation in the value of their skills as technological change becomes the norm.
The second paper is authored by Professor Stokey from the University of Chicago, who finds that businesses often invest in developing the skills of their workforces or in new technologies. Whilst both investments are independently important and useful, businesses that invest in both skills and technology at the same time are able to increase their returns on investment and rapidly expand their productivity.
Featured Researcher Profiles
Professor Jin Young Kim, Korea University
Professor Kim received his PhD in Economics from the University of Chicago in 1994. He currently conducts research in Labour Economics, Economics of Family and Human Capital, IP and technological change. Alongside his professorship, Jin Young is a research associate at the Centre of Excellence on Human Capital, Technology Transfer, and Economic Growth and Development based out of the University of New York at Buffalo. In 2004-06, Prof Kim was awarded the esteemed Kuznets Prize for his papers published in the Journal of Population Economics and now serves as Associate Editor at Journal of Human Capital.
Professor Nancy Stokey, University of Chicago
Professor Stokey received her PhD from Harvard University in 1978 and has been a Distinguished Service Professor in the Department of Economics, University of Chicago since 2004. Her work focuses on growth theory, economic dynamics and monetary policy – and her research is highly influential and cited over 14,000 times. In recent times, Professor Stokey has focused on the influence of technology, skills and society through a human capital lens.
Summary points from the featured research
The link between skills, age and productivity
On the cusp of the global disruption in 2020, the Asian Development Bank (ADB) released a research report that sought to understand the effect of rapid technological development and its effect on the workplace. The two lead researchers, Professor Kim and Dr Park (Deputy Chief Economist at ABD) take a human capital approach to skills. This assumes that skills have a defined useful life from which economic benefits can be extracted by the individual and their employer.
Using this approach, the authors found that productivity is linked to age and peak biological productivity (cognitive or fluid intelligence) is achieved in the 20-30 year old age bracket and declines into retirement. Further, productivity linked to knowledge and ‘know how’ peaks in our early 30s and remains static before beginning to decline in our 60s (as we, ideally, approach retirement).
Figure 1: Productivity by age and intelligence type
The report then links the biological reality of productivity decline with the effect of technological developments that have been empirically shown to create skill gaps and make it difficult for workers to adapt and absorb the benefits of new technology. It also finds that “rapid technological development makes skills depreciate faster than in the past” and when coupled with workers having longer careers and life expectancies, adequate skills management is needed to provide workers with skills that are valuable to the technologically advanced economies of today.
To counteract the decline, businesses and workers need to invest in new knowledge-based skills over their working lives to replace redundant skills and grow their modern skill set. Pursuing constant skilling through lifelong learning can help workers and businesses to bolster their productivity and safeguard future earning potential.
Business investment in skill management systems (or strategic workforce planning) can prolong the productivity of workers and create competitive advantages when labour markets are in transition. Moreover, skill development programs may hold the key to lifting productivity.
The paradox of choice – invest in skills or technology?
As businesses look to invest in improving their operations, they will naturally need to consider what delivers the best value for money and return on their investment. As a result, some firms may compare investments in improving the skills of their workforce (for example, increasing digital literacy skills) to investments in implementing new capital equipment and technologies (i.e. new delivery trucks, forklifts or ERP systems).
The new study by Professor Stokey suggests that analysing investment in skill-based and technology-based investments together, as there is ‘strategic complementarity in the incentives to invest.’ Workers will benefit from improved skills to the point that the existing technology resources available can yield. In other words, workers can reach a point where their skills maximise the potential output, given the current tools available – and without an investment in new tools, the potential output is capped.
As a result, Stokey implores businesses to simultaneously invest in new technologies and new skills for their workers or risk low returns on their investments that fail to justify their investment and/or future investments.2 New technology without the matched skill set available within the business, or new skills without complementary technology, can limit the upside from the investment and yield lower returns.3
The Australian Context
This insight becomes important for Australian managers and workers more broadly as they look to lift productivity in the face of the ageing composition of the workforce. Around 47 per cent of the Australian workforce is in the 40-70 year age group – 21.6 per cent are 40-49 years, 18.2 per cent are 50-59 years and 7.31 per cent are 60-69 years. A sizeable chunk of the workforce is theoretically past its peak biology-based productivity and in the twilight years of their knowledge-based productivity. Our national competitiveness is tied up with ensuring that this large group of important workers remains productive and delivers useable skills to the economy for years to come.
Figure 2 – Australia’s workforce by Age Group
Source: Chart compiled using Census Data 2016
A key strategy to overcome the natural declining productivity of an ageing workforce and counteract the deflation of skills is training. Businesses and individuals should be encouraged - with government subsidies – to pursue training and pursue genuine opportunities for lifelong learning.
It is important that businesses strategically select employees for training that would most benefit from the new skills and also provide opportunities for new skill development throughout their entire organisation.
