For The Labourer is Worthy of His Hire

On the Job Training, Wages etc In the One Nation Statement

H M Boot

The following figure shows the profile of age related weekly earnings among male workers in the British cotton industry in the 1930s.¹ The profile is not significantly different for workers in other major factory industries in Britain in the same period. It demonstrates three important features of investment in skills acquisition through on-the-job training.

First, the profile is one which is explicitly predicted by human capital theory.² The theory predicts that in competitive industries, earnings in occupations where training takes place will be lower during the period of training than those of workers of a similar age in occupations where no training takes place.³ The low earnings during training represent the cost of learning the skill by foregoing the higher earnings offered in the alternative higher paying, but non-training, occupation. Subsequently, the earnings of the trained worker rise above those of the untrained worker as the acquisition of skill raises the trained worker's productivity above that of the untrained worker. The differential in the post-training period is a measure both of the higher productivity conferred by skill, and of the return to the skilled worker from the investment in training. Applied to figure 1 these principles indicate that cotton workers invested about twice as much in on-the-job training as was spent on their school education, and earned about 40 % return on their investment in training.⁴

Second, there is a high degree of conformity between the British profile for 1833, and the profile of weekly earnings in 1959 of United States wage earners with 9-11 years of schooling.⁵ Work by other economists indicates that earnings profiles in many other countries around the world show characteristically similar earnings profiles. The American data also shows that amounts invested in on-the-job training relative to that spent on education, and returns to investment in training were similar to British experience in the 1830s. This appears in spite of an enormous increase in subsidized expenditure on school education which might otherwise be expected to act as an important incentive encouraging people to substitute schooling for on-the-job training.

Thirdly, the British data shows that high levels of investment in, and rewards to, on-the-job training can be achieved in the absence of government direction or intervention in wage setting, or in the training of workers. One of the inherited wisdoms of British economic history is that the Industrial Revolution reduced factory workers to unskilled machine slaves who mindlessly repeated a few simple operations for hours on end. My data shows this is untrue. Factory workers invested at least as much in skills acquisition proportionate to their incomes as American workers in the late 1950s, and received rewards corresponding to their higher productivity.

The experience of British factory workers in the 1830s helps to cast some light on Australian experience of human capital formation, wages, and on-the-job training in the 1990s.

Turning first to questions of the inadequacy in the supply and quality of training in Australia, and to the reasons why that training is inadequate, we find that neither the Prime Minister's One Nation statement nor the much longer Carmichael Report offer any proof or explanation of the alleged inadequacy of training beyond repeating that there is general concern in the community that somehow Australia is falling down on the training of its work-force.⁶ Most of this popular concern, however, is based upon remarkably little hard evidence. In large part, this is because investment in training---except for recorded expenditure on education---is very difficult to observe directly. The best evidence has been gathered by economists using human capital theory to derive estimates of amounts invested in on-the-job training from observed slopes of wage profiles, in much the same way as I have used earnings profiles to show the amount of training undertaken by factory workers in the Industrial Revolution. Economists have used these principles to show that adult wage profiles are much flatter in Australia than in comparable countries.⁷ Youth wage profiles are also found to be flatter---usually starting higher and increasing more slowly---than in comparable countries. This, they consider, is conclusive evidence of the lower levels of investment in on-the-job training occurring in Australia.

It is not difficult to see why neither the Prime Minister nor Dr Carmichael bother to discuss the reasons for the inadequate levels of skill training. Academic economists have studied the problem for a long time, and now accept that two features of Australia's industrial relations framework bear much of the responsibility for low investment in on-the-job training in Australia. The first is the practice of basing wage awards on rigid, narrowly--- defined job classifications. Narrowly defining occupational skills for the purposes of wage awards acts to reduce a worker's incentive to invest in skill because it increases the likelihood of unemployment and/or the technical obsolescence of the skill. Given the opportunity, workers will opt for multi-skilled training to reduce these risks. In the absence of opportunities for multi-skilling, or where awards restrict training to a small set of narrowly defined skills, investment in skill itself becomes more risky, and accordingly much less attractive to wage earners.

The second feature of our industrial relations system which discourages investment in skill is the pervasive practice of establishing awards in terms of binding minimum wage agreements. This practice acts to produce the high, shallow wage profiles for young people, and flat earnings profiles for adults, that are characteristic of the Australian wage system. Human capital theorists associate such profiles with low levels of training, and with lack of skill. This is because flat wage profiles make it difficult for young people to pay for their training by accepting relatively low wages during their training years, and also make it difficult for employers to offer appropriate rewards to skilled adult workers. Flat wage profiles also impose on employers the need to demand higher levels of training and experience from young workers than is consistent with their limited years of experience. It is not surprising, given these contradictory features, that Australia has both a major unmet demand for skilled workers, whilst young people, who would otherwise welcome the opportunity to acquire skilled training, remain unemployed.

How then can the problem of under-investment in skills be solved? Three possible solutions suggest themselves: leave conditions as they are, even though they are not satisfactory; follow the path proposed in the Prime Minister's One Nation statement; or adopt an alternative path of reform designed to address the problems caused by minimum wage and job classification practices. The final part of my paper assesses the relative merits of each of these avenues.

Leaving things as they are is not as unlikely a solution as it may appear. Economists at the A.N.U. have found that there is more flexibility than appears in Australian wages and training.⁸ Flat wage profiles and narrowly defined job specifications have been consistent with quite high levels of investment in on-the-job training, and with substantial rewards to training, especially in industries with high rates of growth of technology. The ability of industry to go on producing these gains arises in part because there is still room for workers to finance at least part of their own training costs, and for employers to vary rewards for training through promotion and by offering over-award payments. It also remains true, however, that quite substantial rewards are earned even though it is not obvious that workers paid for their own training.

In the present climate it seems unlikely that "leaving things alone" would be acceptable policy towards worker training. How well, then, is the Government's policy on training likely to overcome problems of under-investment in training and shortages of skilled labour? At the risk of some violence to detail it may be said that the Government's policy is to produce a structured, formalised system of training based mainly on off-job, post-school training. This training will be completed mainly through TAFE colleges and other privately supplied programs. Trainees and employers will receive various forms of subsidy during training---either directly as cash payments, or indirectly through government financed TAFE, and other government approved training programs. Programs will emphasize "entry level" and pre-vocational training rather than traditional forms of vocational on-the-job training, though opportunities for on-the-job training will continue. Certification of skill will be based on agreed levels of competency, rather than on length of time served in training. Finally, youth wages will be re-examined to take account of the changed status of trainees, the higher quality of training provided, and the need to ensure an adequate number of training positions are available. To finance the new training structures the Government will provide an extra $720m for TAFE colleges in the next triennium to upgrade vocational training, as well as provide other payments to employers to encourage the recruitment and retention of existing apprentices. The Government has also offered to take responsibility for TAFE colleges from the States.

There is no doubt that these changes will encourage more expenditure on training. That will be ensured simply by subsidizing training. Indeed, if young people are paid an income equal to that which could be earned by an independent 18 year old, as suggested in the Carmichael Report, few young people will not be inclined to take on more training. Similarly, subsidising the supply of training services will cause the supply of places to increase accordingly. The real question is, however, not whether more will be spent on training, or whether more young people will complete more courses of training but whether the increase in time and money spent on training is likely to produce the skills that industry requires more efficiently than the present system. Several reasons lead me to suspect that they will not.

The emphasis on pre-entry and pre-vocational training, rather than on specific vocational skills, and the high level of homogeneity characterizing many of the training programs will mean that even when young people have completed their government sponsored training, they will still have to undergo much further vocational and firm-specific training before they are of sufficient value to their employers to make them worth employing at the wages envisaged by the Prime Minister and the Carmichael Report. My reading the One Nation statement and documents like the Carmichael Report leads me to believe that trainees will expect to receive full adult wages on reaching agreed competency levels, whether or not their skills are suitable for the firm which employs them.

A related issue is the question of who chooses the courses and curriculum to be offered, and who polices delivery. Government proposals supported by those in the Carmichael Report imply that there will be a large element of government direction through various training authorities, TAFE colleges, and training agreements negotiated at the industry and enterprise level. If the Carmichael Report can be regarded as an indicator of official thinking, the bureaucratic structure required to carry out the program will be very large indeed, and is unlikely to be fully operative before 1995. It follows that the proposals are unlikely to have much impact on the supply of skills in the short-run, or as the Government hopes "ensure that skill shortages do not constrain recovery."

Even in the long-run it is unlikely the structure will produce the right supplies of appropriately trained labour. This is because the Government must have knowledge of the skills required by each firm if the program is to be fully successful. It is important to recognize that too much training is as much a mistake as too little. Excessive expenditure on training is waste of resources. The likelihood that excessive expenditure will occur is, I suspect, much higher than people think since the large subsidies being offered to both trainers and trainees will create incentives among both groups to offer, and to seek, more training than they would otherwise take. It is only if incentives are pitched exactly right that the correct amount of training investment will take place. Moreover, the large, and complex administrative structure created to deliver and to monitor training, the time required to appoint and train the teachers, to create agreed syllabuses, to supply appropriate buildings and training equipment, and the institutional rigidities created by the vested interests which exist in all educational institutions, will make it very difficult for the structure to respond quickly to the changing demands of industry. The result, one may fairly confidently predict, is that in spite of the large resources devoted to training the skills supplied will rarely meet the needs of industry, while large numbers of young people will be trained in skills that are of little value in gaining a job. There is no doubt, however, that governments will take much satisfaction in claiming that they have trained more people than ever before, and that they have spent a great deal of the nation's resources to do it.

If the government's solution is less than satisfactory is there a better alternative, other than to leave things as they are? The best approach would undoubtedly be to remove those features of Australia's industrial relations structure which currently inhibit workers' and firms' willingness to invest in training. That would mean replacing the current system of binding minimum wage awards, and narrowly defined occupational classifications, with deregulated wages and open, flexible occupational descriptions. This would then allow workers and enterprises to use wages as a signalling device to identify valuable training opportunities, and to serve as rewards for investing in training. Such a move would be further strengthened by ceasing to use the wage bargain as a tool of social engineering aimed at raising the incomes of low paid workers. This would itself be a step forward since there are better ways of solving the problem of low paid workers than by interfering with wage profiles and wage differentials.

Such an alternative is unlikely to get a serious hearing in Australia's industrial relations environment, however. A less ambitious but probably more acceptable alternative would be to encourage enterprise and industry wide agreements over training in which employers would develop training programs and increase training places, perhaps in conjunction with local or regional TAFE colleges and other suppliers of training services. On the other side of the bargain the trade unions would have to agree to wage rates for young workers which reflected more closely than existing wages do, the costs of training, the relative productivity of trainees, and the wage enhancing benefits which trainees stand to gain in later years. The quality and quantity of training provided could then be policed by those parties with a direct interest in the agreement, and firms which did not provide training at agreed levels would be required to pay the higher wages due to workers in non-training jobs. In this way wage profiles of trainees would more closely approximate to those which would encourage the right amount of investment in training which is valuable to industry. It could be put into operation more quickly, would supply properly trained workers earlier, and would encourage earlier and more direct employment of young people in the work-force than the government's program. At the same time it would neither interfere with much needed reform of the TAFE college system nor involve government in the creation of another expensive bureaucratic monster.

Endnotes:

1. For a fuller analysis of these data see "How skilled was the British factory work-force in 1833?" , a paper to be presented to the Conference of the Australasian Economic History Society, Perth, 1992.

2. G. Becker, "Investment in Human Capital: a theoretical analysis", Journal of Political Economy, LXX, (October 1962), pp 9-49.

3. Human capital theory distinguishes between general training - i.e. training which confers skills that are useful in more than one firm - and firm-specific skills - i.e. skills that are useful only in one firm, and which lose their value outside the firm. Training in general skills is financed wholly by the worker, while training in firm-specific skills may be financed partly by the worker and partly by the employer. What matters is that the principles which apply in general training apply, partly at least, to the acquisition of firm-specific skills.

4. Return is expressed as the percentage increase in lifetime income over that earned by an unskilled labourer.

5. J. Mincer, Schooling, experience and earnings, NBER (New York 1974), pp.68-75.

6. One Nation: the Statement, The Prime Minister, The Hon. Paul Keating, 26 Feb. 1992. The Australian vocational certificate training system (The Carmichael Report), Employment and Skills Formation Council, National Board of Employment, Education and Training (AGPS, March 1992).

7. J. Borland, B.J. Chapman and M. Rimmer, "Mirco-economic reform in the Australian labour market", a paper prepared for the conference, Micro-economic reform in Australia, Centre for Economic Policy Research, Research School of Social Sciences, Australian National University, 1991.

8. J. Borland, et al., ibid.