Productivity & Innovation

Role of private sector in the holistic skilling of India’s workforce

  • Blog Post Date14 March, 2018
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Low skill levels of workers are a key reason for low labour productivity in developing countries. In this article, Adhvaryu et al. discuss research that centres around two important questions in this context: who should conduct and pay for skilling, and what kind of skills does the workforce need?

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Businesses in developing countries are characterised by low labour productivity. This suppressed productivity is reflected in the remuneration workers receive. Though several reasons for low labour productivity in developing countries have been identified by research including managerial quality (Bloom and Van Reenen 2010, Bloom et al. 2010) and financing constraints (Banerjee and Duflo 2014), low skill levels of workers in developing countries have received increasing attention among academics and policymakers. Labour and skilling policy debates mostly centre around two important questions - who should conduct and pay for the skilling, and what kind of skills does the workforce need? Given that workers are largely unable to invest in their own skills due to low wages and limited access, the first question addresses whether the public sector is best suited to lead the skilling charge, and how central a role the private sector can and should play. The second question relates to whether vocational skills are sufficient and how important soft skills are in productivity and long-term career success.

Private sector involvement in skilling

Becker (1964) famously argued that in a competitive labour market, gains in productivity due to skilling should be accompanied by commensurate increases in wages. This would imply that the employer could never extract value from skilling its workforce, particularly in the most general skills, and would, therefore, never have an incentive to invest in the skilling of employees.

On-ground realities, however, are often contrary to these predictions. Firms do often invest in the general training of their workforce without commensurate decreases in wages during training. The reason for this discrepancy likely lies in labour market imperfections such as information asymmetry between the ‘training firm’ and other potential employers (Acemoglu and Pischke 1998) and lack of information with regard to worker type (Autor 2001). That is, if the newly trained worker is unable to signal to competing employers that they are now more skilled, they will not be able to generate higher wage offers on the basis of the training. This could allow firms to extract at least some portion of the increased productivity from training its workers because it does not have to raise wages to match higher productivity. On the other hand, if information about the quality of workers, particularly as it relates to less observable aspects like soft skills, is a major constraint for the firms, then providing a certificate signaling the quality of workers can be impactful.

Alfonsi et al. (2017) test for effective implementation mechanisms for skilling of workers in a randomised controlled trial (RCT). Their two interventions were vocational training, and wage subsidies to firms to provide on-the-job training. While both show positive employment impacts, vocational training shows higher impact on employment and earnings compared to on-the-job training, consistent with the certificate from the formal training institute being valuable to workers in the job market because firms have difficulty identifying skills that are not formally certified. Bassi and Nansamba (2017) find that the provision of soft skills certification (absent any augmentation in actual skills) provides gains for both workers and employers.

Both studies show the ability to credibly signal quality is important for the job market to operate efficiently. Two key insights follow from this work. First, firms have difficulty measuring skills of workers in the market, so providing the skilling directly allows firms to know exactly which workers are best or most comprehensively trained. Second, workers benefit from receiving a certification of their skills that firms can use to identify their quality.

The importance of soft skills

The traditional notion is that of investment in ‘hard skills’ for workers driving improvements in productivity, especially in manufacturing settings. Further, in the ‘race to the bottom’, where most firms focus on driving costs further lower in a highly competitive environment, training workers in soft skills does not crop up as an obvious solution to the skill deficit in developing countries. But studies on labour productivity across many industries have emphasised the, perhaps growing importance of soft skills (Bassi et al. 2017, Deming 2017, Groh et al. 2016; Guerra et al. 2014, Heckman and Kautz 2012, Heckman et al. 2006) for even low-wage workers.

Recent studies of the impacts of soft skills training interventions in developing countries have found mixed results on employment and earnings (Groh et al. 2016). These studies mostly focus on unemployed populations with subsequent job matches at best modestly improved. This limits their scope to answer the fundamental question of whether soft skills are, in fact, productivity enhancing. In order to assess whether soft skills are indeed valuable, one must start with a population of already employed workers for whom measures of productivity are easily obtained.

We conducted exactly such a study and our research suggests that investing in soft skills for workers does not only improve social outcomes for workers, but also improves the firm’s bottom line through productivity gains (Adhvaryu et al. 2017). P.A.C.E. (Personal Advancement and Career Enhancement) is a training programme designed by Gap Inc. which teaches skills like effective communication, time management, decision-making, problem-solving, and financial literacy to female garment workers. The training involved weekly group sessions at the workplace. In 2013, we implemented an RCT in five factory units owned and operated by Shahi Exports Pvt. Ltd. India’s largest garment export firm. 2,703 workers who initially expressed interest in the programme were randomly assigned into ‘treatment’ and ‘control’ groups, within and across production lines. The treatment received the intervention which was the P.A.C.E. training, and the control group did not.

On the social side, P.A.C.E. trained workers had higher self-regard, were more likely to save for their children’s education, and use State-sponsored healthcare and pension schemes. They were also 8.7 percentage points more likely to report an expectation of promotion within the next six months, and 15.8 percentage points more likely to request training in technical skills. Contrary to traditional wisdom, they were also better employees. They were 20% more productive after the training, and more likely to be assigned to complex tasks. Treated workers were no more likely to leave the firm after programme completion. In sum, we found that the soft skills training provided a net return of over 250% to the firm, eight months after programme completion.

Our study helps build the case for businesses to invest in the skilling of their employees. Till date, Gap Inc. has trained over 60,000 women in 12 countries through P.A.C.E. and motivated in part by the experiment, hopes to reach 1 million by 2020.

The study also motivated our team to look at how soft skills training for production line supervisors (factory floor managers supervising the work of sewing machine operators) affects the overall work environment for workers (harassment and abuse) as well as their retention, attendance, and productivity. To optimise the content of the training, we conducted extensive surveys on baseline managerial practices and styles, workplace behaviours, and personality characteristics of over 2,000 supervisors at Shahi Exports - our industry partner. We then matched this with productivity data, which allowed us to identify the relative contributions to productivity of different aspects of managerial quality. We were also able to identify which dimensions of managerial quality were most deficient across all supervisors, in order to design modules to remediate these deficiencies.

In a follow-up trial, we randomised roughly half of the supervisors within each factory to be trained in deficient skills by certified trainers. The treatment group recently completed the 25-week training programme. Follow-up surveying and administrative data collection is currently underway to assess the impact of the training on the incidence of abuse and harassment and worker satisfaction and welfare as well as resulting worker attendance, retention, and productivity.

Comprehensive skilling as a public-private partnership

The Indian government, too, has set ambitious targets when it comes to skilling, one of which is training 10 million youth in areas such as financial and digital literacy, entrepreneurship, and soft skills by 2020. These efforts can be significantly bolstered by the private sector, given the business returns demonstrated by our P.A.C.E. experiment. That is, private sector firms poised to hire these newly trained workers are the residual claimants on these skilling endeavours and as such are heavily incentivised to ensure that training is successful and job placements and long-term retention are maximised.

The government’s targets are not limited to soft skills. Schemes like the Deen Dayal Upadhyaya Grameen Kaushalya Yojana (DDUGKY) are aimed at meeting India’s need of 100 million skilled workers by 2020 in a holistic manner by including soft skills training alongside technical training. The importance of such efforts becomes especially apparent for rural women in India when one considers that the female labour force participation (FLFP) rate in India has fallen from 36% in 2005-06 to 24% in 2015-16. A government-certified training such as this one also addresses the issue of workers’ being able to signal new skills to potential employers, as discussed above.

In search of a solution to India’s need for a skilled workforce and the declining FLFP rate of a growing economy, we are running another RCT in which we are randomising the placement of Rural Training Centers (RTCs) under the DDUGKY scheme across candidate village clusters in rural Karnataka. The RTCs will not just train those who enrol in the technical skill of sewing, but also soft skills, and provide guaranteed job placement at a garment manufacturing factory. This, we hypothesise, will influence women’s welfare in rural India as the garment industry is one of the major employers of women in the country, creating 8.3 female jobs per lakh investment, apart from improving the skill set of a large and currently marginalised part of India’s workforce.

Further, we are carrying out psychometric measurement via surveys to understand which characteristics make workers more likely to take up training and formal factory employment, which predict long-term career success. In an industry that is characterised by high levels of attrition it becomes crucial for the firm to find ways to identify workers that are likely to stay beyond the first six months in order to allocate recruitment and training resources efficiently. Even for workers, this high turnover indicates that perhaps some workers would have been better off not taking up training and employment in this particular industry and their place in the training centre and firm could have better served a different candidate.

For both reasons, better targeting and selection of candidates is crucial for the sustainability and efficient scaling of these skilling endeavours especially if we are to leverage the incentives of the private sector to amplify government resources and efforts. In addition to measuring and analysing personality traits that predict take-up of skilling and employment and long-term success in the labour force, we are also introducing treatments to ensure workers are fully informed about the job and work environment, and self-selection mechanisms to reveal workers true degree of interest in the opportunity.

We hope to measure how providing targeted access to skilling and employment to women from low-income and marginalised households can generate both economic and social mobility for India’s idle female workforce and meaningful growth for firms. Ultimately, from the perspective of the new female labour force entrants and the households and communities they represent, we want to see how providing skilling and formal employment to a large proportion of rural women affects household gender norms and female bargaining power over consumption and expenditure. Currently, the baseline survey for this experiment is being rolled out among 1,300 households across 20 taluks1 in Karnataka and Andhra Pradesh.

Leveraging dual benefit for sustainability and scale-up

All the experiments outlined above point to one clear policy insight when it comes to skilling and labour market productivity – the private sector can and must play an active role in driving long-term economic development in India. From identifying women most interested in working and improving employability with comprehensive skills training to providing a healthy, safe, and supportive work environment. Further, businesses must not view these efforts as philanthropy, but as core business investment in a distorted labour market. They must take steps to close the skill gap because skilling and employing the idle (disproportionately female) rural workforce will not only improve the lives of workers and their households but can significantly improve firms’ productivity.

By capitalising on this dual benefit, government efforts can be bolstered, scaled and sustained in partnership with the private sector. This is the core concept underlying all of the research work we are undertaking with Good Business Lab. So what kind of training should a person get and who should pay for the training? There is no one simple answer, but recent research has given us some insights. Soft skills training needs to be as important a component of skilling as technical skills, and while the government can frame policies, it is with active private sector involvement that skilling and employment of the rural workforce can be accomplished successfully and efficiently at scale.

Note:

  1. Taluk is a subdivision of a district; a group of several villages organised for revenue purposes.

Further Reading

  • Acemoglu, Daron and Jorn-Steffen Pischke (1998), “Why do firms train? Theory and evidence”, The Quarterly Journal of Economics, 113(1):79-119. Available here.
  • Adhvaryu, A, N Kala and A Nyshadham (2018), ‘The skills to pay the bills: Returns to on-the-job soft skills training’, National Bureau of Economic Research Working Paper No. 24313.
  • Alfonsi, L, O Bandiera, V Bassi, R Burgess, I Rasul, M Sulaiman and A Vitali (2017), ‘Tackling Youth Unemployment: Evidence from a Labor Market Experiment in Uganda’, Suntory and Toyota International Centres for Economics and Related Disciplines, London School of Economics.
  • Banerjee, Abhijit V and Esther Duflo (2014), “Do firms want to borrow more? Testing credit constraints using a directed lending program”, Review of Economic Studies, 81(2):572-607.
  • Bassi, V and A Nansamba (2017), ‘Information Frictions in the Labor Market: Evidence from a Field Experiment in Uganda’, University College London.
  • Becker, GS (1964), Human capital theory, Columbia, New York.
  • Bloom, Nicholas, Aprajit Mahajan, David McKenzie and John Roberts (2010), “Why do firms in developing countries have low productivity?”, American Economic Review, 100(2):619-623. Available here.
  • Bloom, Nicholas and John Van Reenen (2010), “Why do management practices differ across firms and countries?”, Journal of Economic Perspectives, 24(1): 203-224. Available here.
  • Bassi, V, A Nansamba and B Liberia (2017), ‘Information frictions in the labor market: Evidence from a field experiment in uganda’, Technical report, mimeo.
  • Deming, David J (2017), “The growing importance of social skills in the labor market”, Quarterly Journal of Economics, 132(4):1593-1640. Available here.
  • Groh, M, N Krishnan, DJ McKenzie and T Vishwanath (2012), ‘Soft skills or hard cash? The impact of training and wage subsidy programs on female youth employment in Jordan’, World Bank Policy Research Working Paper No. 6141.
  • Guerra, N, K Modecki and W Cunningham (2014), ‘Developing social-emotional skills for the labor market: The practice model’, World Bank Policy Research Working Paper No. 7123.
  • Heckman, James J and Tim Kautz (2012), “Hard evidence on soft skills”, Labour economics, 19(4):451-464. Available here.
  • Heckman, James J, Jora Stixrud and Sergio Urzua (2006), “The effects of cognitive and noncognitive abilities on labor market outcomes and social behavior”, Journal of Labor economics, 24(3):411-482. Available here.
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