Economics of skill formation: a note on the need for proper manufacturing base.

AuthorPadhi, Satya Prasad

Economic Issues

At present, in India, there is the urgent need for the skill formation. The acquisitions of new and advanced technologies by Indian firms, and the move from a sellers' market to a consumer friendly market, has created a demand for skill sets (and specialists) that are not available or not created by the educational system. (In a way, this development is contrary to the human capital theory postulate where the educational system creates such changes). The related demand for the educational system to adapt to the new environment/challenges however requires enormous developmental funds; experience suggests that mere institutional arrangements in terms of setting up of ITIs, or vocational studies, etc. are not enough; one has to equip them properly. The ability of the economy to make the necessary adjustment would have to take into account the fiscal constraint that the government faces when it also has to facilitate the generation of private finance for such technological acquisitions. Second, in today's scenario, the creation of skilled laborers pertains to skill sets that define global competitiveness; even if the government imparts the requisite skills, it only makes the labor force globally mobile. The domestic firms have to pay higher wages to retain them. In this sense, the adjustments have to depend on the growth of firms, which generate the funds for imparting skills and ensure higher returns to the firms. Third, if imported technologies create the skill gap because they are aspects of continuous firm-specific industrial differentiation in the developed countries that continuously define new tasks, new specializations; skill sets relevant today can be irrelevant tomorrow; therefore, outside creation of particular types of skill sets (say, supported by government's borrowing) may not remove the skill constraints facing higher growth prospects, which in turn can create fiscal insolvency.

These observations suggest that the onus of skill formation lies with the firms. This raises three issues. One, the firm that creates skill and pays higher wages, also has to realize higher profits. That is, skill formation requires a growth of firm that can ensure both higher wages and profits.

Second, if skill formation is at the level of the firm, the retention issue becomes important. As Baran (1952:84) noted, "starting a new industrial enterprise is predicated among other things upon the availability of appropriately skilled manpower. Engaging men and training them on the job is time consuming and expensive. They are liable to be unproductive, wasteful, and careless in the treatment of valuable tools and equipment. Accepting the losses involved may be justifiable from the standpoint of individual firm if such a firm can count with reasonable certainty on retaining the services of those men after they go through training and acquire the requisite skills. However, should they leave the firm that provided the training and proceed to work for another enterprise, that new employer would reap the fruits of the first firm's outlays." He goes on to point out that even if this problem is non-existent in the developed country, it assumes importance in an underdeveloped region, highlighting the differences between private and social benefits, i.e. even if society would benefit, individual businesspersons cannot afford to provide the training, unless they can retain the created skilled workers. (In fact, the above difference sometimes calls for government intervention; but the present paper tries to show that skilled workers turnover is less of a problem if it is created by the firm level - see below).

Third, individual initiatives for skill formation have to be part of an overall growth process that has to define the evolution of both new technologies and new skill sets, without facing skill gap constraints.

These three conditions are the ones under which an economy does not face the skill gap constraints. To start with, a particular focus can be on the developed countries that do not face the skill gap constrains in their development process. As an astute observer of scientific developments, Marx (1977) noted that the development of science (say, advent of stream power based on an accurate investigation of the law of friction), facilitating larger scale production in the advanced countries, never faced skill labor gaps constraints because of the prior existence of division of labor in these economies. There is no doubt the...

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