Reskilling has become topical over the past few years. On the political front, a cabinet decision in 2022 stated the intention to “fundamentally enhance human capital investment and shift labor to growth sectors” and set a specific policy target to invest 1 trillion yen over a five-year period. In business circles, the Japan Business Federation (Keidanren) is calling for companies to secure time for employees to engage in reskilling education. At the individual company level, major Japanese companies, such as Yamato Transport and JAL appear to be starting to achieve some results as they continue to explore ways of allowing incumbent workers to undertake further education. Therefore, this article provides an overview of academic knowledge and policy implications related to reskilling, defining reskilling broadly as adult education in the practical skills needed by companies and in the labor market.
Reskilling by incumbent employees, unlike learning by students, requires the involvement and cooperation of employer companies. What is important in that respect is whether the skills acquired are firm-specific or not, that is, whether the skills are useful for outside employer companies as well. Applying the concept of human capital that traces back to Becker (1964), we can call versatile skills that can be used outside employer companies general human capital, while skills useful only for employer companies may be called company-specific human capital. Examples of general human capital include knowledge and understanding of programing languages, such as Python and SQL. Extreme examples of company-specific human capital are knowledge of in-house organizational structures developed through the rotation of employees across business divisions and departments and the human relationships cultivated as a result of the rotation.
Why Do Companies Provide Reskilling Training?
From the perspective of labor economics, there has been an accumulation of important insights regarding both types of skill. One of the monumental milestones of theoretical research in the field of adult education related to general human capital is the study by Acemoglu and Pischke (QJE 1998, JPE 1999; hereinafter “AP”). Previous studies indicated that under the premise of a fully competitive labor market with complete information, competition arises among firms to acquire workers whose marginal productivity has risen due to the accumulation of skills, with the result that firms cannot obtain surplus from training. This environment cannot explain firms’ active involvement in adult education. To overcome this conundrum, AP considered the case of an environment in which the labor market neither has complete information nor is fully competitive, with information asymmetry existing between workers’ current and potential employers. AP showed that in this case, as companies can benefit from an increase in marginal productivity, there is an inducement for current employer companies to invest in skills.
In the field of empirical research, significant progress has been made in recent years. The essence of AP’s theory is that the rise in marginal productivity due to the accumulation of skills outweighs the increase in workers’ wages, because firms gain benefits by receiving the difference between the increases in marginal productivity and wages as a return on investment in skills. However, it was difficult to directly test this idea based on data because a rise in marginal productivity usually cannot be directly observed. Dong, Kawaguchi, and Hyslop (2023) approached this problem by adopting a unique setup—Japanese temporary staffing agencies. Namely, they focused on the fact that when workers received skill-based training at temporary staffing agencies, the increase in fees that the agencies receive from clients may be considered to be equivalent to a rise in the trained workers’ marginal productivity. Indeed, they found that the increase in the fees received due to the accumulation of skills outweighed the increase in those workers’ wages, a finding consistent with AP’s model.
Let us move on to company-specific skills. As firm-specific skills acquired by employees are useful only for their employers, it is natural to assume that firms are more likely to invest in those skills than in general skills. However, AP went one step beyond that assumption and made an argument which provides additional insights regarding specific skills. Imagine a situation in which both general and specific skills are important and complement each other. For example, if experienced employees who are familiar with the employer company’s internal organizational system understand the basics of programming, productivity should be improved by efficiently assigning human resources based on the needs of the tasks at hand. In this case, for the firm, investing in general skills arises precisely because the worker has invested in specific skills.
What Should be Targets of Policy Support
When considering what policy measures to take, an important point is what sorts of retraining programs should be supported by the government. At a common-sense level, the answer may be that training programs that lead to the accumulation of general human capital should be actively encouraged and assisted, while the development of firm-specific human capital should be left to firms. However, based on argument above, when the benefits that firms (rather than employees) can obtain from training are small, or when little complementarity exists between general and specific skills, providing policy support is important, because investment in general human capital is not spontaneously undertaken.
There has been little progress in the field of empirical research concerning firm-specific human capital. The main obstacle is that purely firm-specific skills are, by definition, difficult to measure. Additionally, it is difficult to theoretically handle too large dimensions of firm-specific skills. I believe that it is important for the academic circles to contribute to policy discussions by proceeding with data-based research in this field.
January 10, 2024
>> Original text in Japanese
