My latest Reuters Opinion column is an attempt — a modest attempt — to start discussing an issue I consider extremely important, which is understanding how business enterprises invest in human capital and how public policy ought to reckon with this central fact of modern economic life.
There are a number of ways firms invest in human capital. As Michael Schrage details in his ebook Who Do You Want Your Customers to Become?, innovative firms invest in the human capital of their customers by teaching them to do entirely new things, or to do old things in new ways. Perhaps the most obvious example Schrage cites is that of Google. Before the advent of Google, web search was a cumbersome, slow process that only rarely yielded meaningful, useful answers to simple queries. Google’s breakthrough technology taught its users to become Searchers. By making it easy and fast to find the information you need when you need it, Google rewired our brands, and they made us want information even faster, and in even more contexts. This creates a problem for Google — now that we’re all Searchers, we’ve become impatient with even the slightest hiccup, and we want Google results to be faster and more relevant still. Yet the DNA of Google as a company gives them a leg up on competitors who try to serve this market of Searchers. Because Google “invented” our society of Searchers, it is in a much better place to serve it. Schrage has given us a wonderful tool for understanding what innovation really is — it’s a way of getting us to rethink who we are and what we’re capable of. In a short review, Tim O’Reilly describes another example of this kind of innovation:
Think for a moment about how Henry Ford didn’t just create cars — he had to create a whole new vision of society in order to create customers for those cars. Edison didn’t just invent the lightbulb and the phonograph, he invented people who came to rely on those things, and everything else that electricity now lets us take for granted.
More prosaically, firms also invest in the human capital of their employees. But consider the risks this entails. What if you find a raw recruit and train her to the point where she is extremely competent, and indeed essential to the success of the firm? You have actually created a problem for yourself, as your employee is now so well-trained that other firms will want her services, and you will have to pay top dollar to retain her. This is obviously a wonderful thing for your employee, but it is a mixed bag for you. So one strategy is to see to it that your human capital investment in new employees is firm-specific, i.e., the skills she gains, the networks she builds, etc., are only relevant, or only visible, to those within the firm. Outside firms might not know how capable she is, particularly if she is not in a client-facing role, and so you, as the employer, can reap the rewards of your investment. Yet talented employees might want opportunities to take on more visible, client-facing roles, and you may well have to offer your employees these roles to keep them from jumping ship. So how do you get firms to make these investments in the human capital of their workers when they face the very real risk of defection? Contracts are one solution — you can insist on a non-compete clause, though there’s no guarantee that these clauses will be enforced.
You’ll notice that I’m talking about a high-end employee, but a broadly similar dynamic obtains even with low-level, low-wage employees. As I discuss in the column, and as Tyler Cowen discussed in “Automation Alone Isn’t Killing Jobs,” many American workers, particularly young American workers, struggle with meeting the expectations of the modern workplace:
There is also a special problem for some young men, namely those with especially restless temperaments. They aren’t always well-suited to the new class of service jobs, like greeting customers or taking care of the aged, which require much discipline or sometimes even a subordination of will.
Firms that take on the challenge of employing these young men face a real risk. They have to deal with the various personal crises that might force these men to interrupt their work, and with the behavioral problems often associated with a chaotic upbringing. High-end, high-wage employers shield themselves from these challenges by contracting with staffing organizations that hire and fire such workers in a rapid churn, or by not hiring such workers at all. But should we celebrate firms that don’t employ low-productivity, low-wage workers who need on-the-job training most? Or should we celebrate firms that do undertake this challenge?
My tentative view is that we ought to celebrate responsible low-wage employers that help correct for the deficiencies of families that fail to provide children with the stability and the role models they need to achieve self-reliance as adults and for the deficiencies of K-12 schools that, despite the good intentions of teachers and administrators and despite the deployment of substantial resources, generally fail to help children overcome the handicaps associated with growing up in chaotic families. In the course of the minimum wage debate, I’ve often heard that low-wage employers — quick-service restaurants, chain retailers, etc. — are villains, as their employees often depend on transfers. One could just as plausibly argue that the public schools that serve these women and men are the villains, as they ought to have prepared these individuals for more remunerative employment. Or we could blame their parents, and their parents’ parents. And on and on in an endless chain. Why exactly should the buck stop with the low-wage employer who decided, for entirely innocent reasons, to take a chance on a worker with limited skills who is in need of a job?
Rather than punish entry-level and low-wage employers, we need to think hard about subsidizing them when they employ the hard-core unemployed, the disabled, ex-offenders, and other people who can be difficult to employ. Responsible low-wage employers are not the enemy. They help their workers climb the economic ladder, and they do it after many other institutions have failed to do so.
I should also mention that large firms are generally far better employers than small firms, as they are more likely to offer avenues for upward mobility, employer-based IRAs, and other programs that help workers, including low-income workers, build assets and skills. One policy upshot of this fact is that we might consider offering firms subsidies for employing low-wage workers in the form of credits against corporate tax. This would see to it that only companies with corporate tax liability would reap the benefit of the subsidy, thus encouraging larger firms to become more inclusive employers. I can see many potential objections to this approach, and it requires more thought on my part. But this is how we need to start thinking in an age in which firms are eager to offload the responsibility for training workers onto the public sector or onto debt-burdened individuals, who are often required to spend years as unpaid or underpaid apprentices before high-wage employers are willing to take them on as paid employees.