The skills delusion

Adair Turner, Chairman of INET (Institute for New Economic Thinking) and one-time Chairman of the UK’s FSA (Financial Services Authority) wrote a weighty article a year or so ago on the need for more investment in our human stock

We cannot better his choice of words so, below, reproduce much of his article verbatim

It should be read whilst keeping in mind that Prime Minister Tony Blair once targeted 50% of school leavers becoming graduates (it didn’t matter what in) – and, more recently, some experts have been encouraging kids to study STEM subjects (Science, Technology, Engineering or Mathematics) to benefit both themselves and the national economy – however, others have confused the kids by saying they should choose humanities/ liberal arts instead ‘to hone their skills for expression, creativity and thinking’

Turner offers a different slant on such matters


Everybody agrees that better education and improved skills for as many people as possible is crucial to increasing productivity and living standards and to tackling rising inequality – but what if everybody is wrong?

Most economists are certain that human capital is as important to productivity growth as physical capital – and to some degree, that’s obviously true – modern economies would not be possible without widespread literacy and numeracy

But one striking feature of the modern economy is how few skilled people are needed to drive crucial areas of economic activity:

  • Facebook has a market value of $374 billion but only 14,500 employees
  • Microsoft, with a market value of $400 billion, employs just 114,000
  • GSK (GlaxoSmithKline), valued at over $100 billion, has a headcount of just 96,000

The workforces of these three companies are but a drop in the ocean of the global labour market and yet they deliver consumer services enjoyed by billions of people, create the software that supports economy-wide productivity improvements, or develop drugs that can deliver enormous health benefits to hundreds of millions of people

This disconnect between employment and value added reflects the role of ICT (Information and Communications Technology) – hardware power keeps on improving dramatically – and software, once created, can be copied at almost zero cost making low-cost automation of ever more economic activities possible and requiring high skills from only a tiny minority of the workforce

Despite this trend, more people than ever seek higher education levels, believing higher skills bring higher pay – but many higher-paid jobs may play no role in driving productivity improvement:

  • If more people become more highly skilled lawyers, legal cases may be fought more effectively and expensively on both sides, but with no net increase in human welfare – they’re zero-sum jobs
  • The same applies to much financial trading, or developing new fashions and brands

So more people receiving higher education does not necessarily mean their higher skills will drive productivity growth

Likewise, at the lower end of the income scale, it is not clear that better skills will offset rising inequality – new jobs can always be created as we automate away many existing jobs, but the jobs often pay less

Consider projections by the US BLS (Bureau of Labor Statistics) for job creation over the next 10 years:

  • Of the top ten occupational categories that account for 29% of all forecast job creation, only two – registered nurses and operational managers – pay more, on average, than US median earnings – while most of the other eight pay far less
  • Employment is growing fastest in face-to-face services such as personal care – these jobs are more difficult to automate than manufacturing or information services – but they require only limited formal skills or on-the-job training
  • Job categories that require specialist ICT skills do not even make the top ten
  • Overall, the BLS foresees 458,000 more personal-care aides and 348,000 home-health aides, but only 135,000 more software and application developers

But wouldn’t better skills enable people currently in rapidly growing but low-pay job categories to get higher paid jobs?

In many cases, the answer may be no

However many people are able to code, only a very small number will ever be employed for their coding skills – and even if someone currently in a low-skill job is equipped to perform a high-skilled one at least adequately, that job may still go to an employee with yet higher skills, and the pay differential may still be great – in many jobs, relative skill ranking may matter more than absolute capability

So “better education and more skills for all” may be less important to productivity growth and a less powerful tool to offset inequality than conventional wisdom supposes

However, Turner concludes that, in this new world, education and skills are more important  than ever – not because they raise everyone’s price in the labour market, but because they equip us to live more satisfying lives, enjoying the arts, science and each other more, for example


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