Human Capital Growth and Labor Market Flexibility

Justin Ho Author

04/03/2021 Added

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An empirical analysis of the relationship between human capital growth and labor market flexibility

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[00:00:00.730]Hello, I'm Justin Ho.
[00:00:01.770]And today I'm gonna present
[00:00:02.990]about human capital growth and labor market flexibility.
[00:00:05.574]My advisor for this project is Dr. Christopher Mann.
[00:00:08.706]The main objective
[00:00:10.010]of this paper is to study the relationship
[00:00:11.367]between human capital growth and labor market flexibility.
[00:00:14.564]In 2013, Cairo attempted to study this relationship
[00:00:17.489]and argued that the recent decline
[00:00:19.580]in labor market flexibility can be explained
[00:00:21.360]by the increase in training.
[00:00:23.271]However, from our empirical analysis,
[00:00:25.690]this is probably not the case
[00:00:26.945]since the analysis on the aggregate level failed
[00:00:29.524]through reflective relationship
[00:00:31.100]on an industry level analysis.
[00:00:32.573]On the other hand, in an older model
[00:00:34.956]as proposed by Hashimoto, which was an extension
[00:00:38.046]of Becker's model on training,
[00:00:40.385]firms would actually compensate workers
[00:00:42.580]for accumulating specific skills
[00:00:44.040]to avoid separation inefficiency.
[00:00:45.859]There is evidence from an analysis
[00:00:47.960]that there is compensation
[00:00:49.058]of workers seen to be separating nonetheless.
[00:00:53.267]Before I go any further,
[00:00:54.790]let me just define a few terms.
[00:00:56.017]First of which is human capital
[00:00:57.930]which refers to the workers experience
[00:00:59.294]and skills that contribute to productivity.
[00:01:01.423]The second term is labor market flexibility
[00:01:03.805]whereby we have two distinct reallocation,
[00:01:07.246]namely job reallocation and worker reallocation.
[00:01:10.412]Job reallocation refers to the creation
[00:01:11.797]and destruction of jobs
[00:01:13.373]whereas worker relocation refers to the turnover labor
[00:01:17.038]which means the hires and separations.
[00:01:19.659]In this project,
[00:01:21.310]human capital measurements is based
[00:01:22.538]on the O*NET trainer indices datasets
[00:01:25.230]with four distinct training indices namely
[00:01:27.990]on the job training, in-plant, onsite training,
[00:01:30.870]relevant work experience, and required level of education.
[00:01:33.571]And how we are studying the changes
[00:01:35.690]over time is by actually examining
[00:01:38.000]the compositional shifts within industries.
[00:01:41.880]This is done by matching occupations
[00:01:43.620]with reported training indices and account
[00:01:46.176]for the changes in occupations within these industries.
[00:01:50.413]And the following are the overall trends that we observed.
[00:01:53.325]On the job training, employment onsite training
[00:01:55.617]and relevant work experience are increasing over time.
[00:01:58.864]However, required level of education is insignificant
[00:02:01.552]which is a bit counterintuitive to us.
[00:02:04.779]We further study using interaction between time
[00:02:08.930]and industry to show differences between industries
[00:02:11.300]and we observed a lot of variations within industries.
[00:02:15.610]For example, for finance and insurance, we see
[00:02:18.401]that all for training indices has increased over time.
[00:02:22.060]However, it seems like onsite and in-plant training
[00:02:24.848]as well as required level
[00:02:26.128]of education seem to be affected by the great recession
[00:02:28.752]as there are some much shift it in the trend line.
[00:02:33.170]On the other hand,
[00:02:34.003]health care and social assistance
[00:02:35.383]has the on the job training
[00:02:37.370]and required level of education declining over time.
[00:02:40.040]And the trend might not be the appropriate way
[00:02:43.670]to describe it given the fact that from 2011 to 2012,
[00:02:47.276]there is a marked increase over time.
[00:02:50.950]And that seems to me more of a structural change.
[00:02:53.900]One explanation might be the passage
[00:02:55.663]of the Affordable Care Act that changed the labor market
[00:02:58.810]of healthcare, social assistance industry.
[00:03:01.131]The following graph is the job reallocation rate over time.
[00:03:04.690]As you can see, job reallocation rate has been declining
[00:03:07.810]over this two decades.
[00:03:09.550]And this is driven
[00:03:10.410]by both the decline in job gains and job losses.
[00:03:14.150]So what does it mean
[00:03:15.326]with a declining job relocation rate as a whole?
[00:03:19.250]Well jobs are changing at a slower pace.
[00:03:21.180]And this is a concern
[00:03:22.013]for some economists who argue that this is an example
[00:03:25.429]of the declining innovation entrepreneurship
[00:03:27.383]in the US economy.
[00:03:29.380]This is because a lot of startups,
[00:03:31.444]innovative startups tend to create
[00:03:33.534]and destroy a lot of jobs.
[00:03:35.230]And the decline in job relocation rate might be
[00:03:39.201]because of the decline in the number
[00:03:41.650]of startups that we have.
[00:03:42.887]On the other side,
[00:03:44.390]some economists argue that this is associated
[00:03:47.171]with higher productivity and higher incidences of training
[00:03:50.056]and therefore this is not something to be concerned off.
[00:03:53.125]Worker reallocation rate seems to be more cyclical
[00:03:57.020]as there's a decline during the Great Recession.
[00:03:59.400]And notice that hires and separation rates actually move
[00:04:02.510]in the same direction.
[00:04:03.752]Decomposing separation rates
[00:04:06.120]over time, you can see that quit rates seem
[00:04:08.591]to follow a similar trend to separation rates.
[00:04:12.150]However, layoff seems to be flat
[00:04:13.948]from 2000 to 2010 and then decline after 2010.
[00:04:20.310]So what's the significance
[00:04:21.216]of worker reallocation rate?
[00:04:23.090]Haltiwanger and Davis in 2014 noted
[00:04:25.923]that that there's a decline
[00:04:27.650]of worker reallocation rate from the '90s to 2014.
[00:04:31.720]And they argue partially
[00:04:32.976]that this is a problem because occupational mobility
[00:04:35.897]and wage growth is highly intertwined.
[00:04:38.670]And therefore workers are not changing their jobs,
[00:04:40.693]this might explain the stagnating wages we see recently.
[00:04:43.693]Also, they're concerned about unproductive matches
[00:04:47.750]whereby workers are not changing jobs due
[00:04:49.640]to job lock or fear of long job loss spells
[00:04:52.575]which might cause the unproductive matches
[00:04:55.830]to remain matches, and not separate as a result.
[00:05:00.105]On the other side of the debate,
[00:05:02.030]some economists argue
[00:05:03.065]that this means that there's higher job security
[00:05:05.740]as we see a decline in layoff rates.
[00:05:08.220]And this actually encouraged firms to invest
[00:05:10.590]in specific training
[00:05:11.590]since workers are not changing their jobs as frequently.
[00:05:14.646]To study the relationship
[00:05:16.100]between job reallocation rate and training indices,
[00:05:18.500]the following is the linear regression model.
[00:05:21.020]I use dummy variables for industry
[00:05:22.534]and also in the interaction between time and industry
[00:05:26.100]as well as assuming a linear relationship with time.
[00:05:28.926]And this is the summary of results.
[00:05:31.210]For on the job training,
[00:05:32.400]in-plant on-site training and relevant work experience,
[00:05:34.890]all the estimators are insignificant.
[00:05:36.553]However for the estimator for required level of education,
[00:05:39.237]it is actually significant with a positive as well.
[00:05:43.167]However we decompose it for the,
[00:05:45.760]to look what's the main driver behind it.
[00:05:48.403]And job gains rate is actually insignificant.
[00:05:50.951]However job losses rate seems
[00:05:52.740]to be significant and positive.
[00:05:55.020]And this is a bit counterintuitive
[00:05:56.509]because required level education is often associated
[00:05:59.433]with job security.
[00:06:01.230]This seems to contradict a model developed by Cairo in 2013.
[00:06:05.330]One of the possible explanations that I could think
[00:06:07.339]about is that the date on training used
[00:06:10.210]in Cairo, 2013 is based on training for the whole economy.
[00:06:15.871]She used the dictionary of occupational titles.
[00:06:19.750]And from the graph below,
[00:06:20.699]as you can see when plotted job reallocation rate
[00:06:23.171]and required level of education,
[00:06:25.347]there is a distinct negative relationship that we observe.
[00:06:29.390]However, this holds only for the aggregate economy
[00:06:32.460]but seems to fail when analyzed by industry.
[00:06:34.978]An alternative explanation that seemed to fit
[00:06:37.620]with our empirical observations is proposed
[00:06:40.010]by Beaudry, Green & Sand in 2013.
[00:06:42.730]And this is based on the argument that the maturity
[00:06:44.940]of general purpose technology i.e computers has to do
[00:06:47.787]with observations that we see right now.
[00:06:50.896]And they argued that the creation
[00:06:53.080]of general-purpose technologies
[00:06:54.680]are skilled labor intensive and the maintenance of it.
[00:06:57.350]And therefore as the industry gets more mature,
[00:07:00.939]the creation has declined
[00:07:03.272]and that has decreased the demand for skilled labor.
[00:07:06.200]And as for now, getting a college degree is more to compete
[00:07:09.600]with lower skilled labor than actually engage
[00:07:11.950]in the creation of GPT and more productive purposes.
[00:07:15.860]This has many implications
[00:07:17.041]as to what are the returns of a college degree
[00:07:19.729]and ideas about reforming the education system as a whole.
[00:07:23.741]What should actually be taught in college,
[00:07:25.645]maybe instead of a technical skill accumulation,
[00:07:28.501]you perhaps should focus on decision making
[00:07:31.049]and also innovative thinking
[00:07:33.089]that could actually circumnavigate this issue
[00:07:35.264]with the maturity
[00:07:37.252]of general purpose technologies.
[00:07:39.750]For the analysis
[00:07:40.620]of worker reallocation rate and training indices,
[00:07:42.930]we use a similar model of using interaction
[00:07:44.650]between time and industry, as well as dummy industries
[00:07:47.750]and also assuming a linear relationship between time.
[00:07:51.157]And our observation is that
[00:07:53.049]on the job training, employment site training,
[00:07:55.940]and relevant work experience have positive
[00:07:57.348]and significant estimators for worker reallocation rate,
[00:08:00.440]hires, separations, and quits.
[00:08:02.640]However we do find insignificant estimates for layoffs.
[00:08:05.870]On the other hand for required level education,
[00:08:07.909]we find a positive and significant estimator for layoffs
[00:08:11.069]which actually supports our previous findings
[00:08:13.540]in the previous section.
[00:08:14.766]Based on these observations,
[00:08:16.935]I was actually curious
[00:08:18.005]oN whether we were observing
[00:08:20.020]separation inefficiency at play.
[00:08:21.910]And my hypothesis is that on job training,
[00:08:23.917]and implant onsite training, assuming both
[00:08:26.670]of these to be specific skills
[00:08:27.901]is actually not associated with higher wages.
[00:08:30.281]This is based on the idea
[00:08:31.820]that specific skills investment is invested
[00:08:34.628]by the employee and therefore all
[00:08:37.660]of the pay offs would go to the employer.
[00:08:40.420]And performing regression with interaction
[00:08:42.191]of industry and time,
[00:08:43.670]it shows that all four training indices
[00:08:45.500]are actually associated with higher wages.
[00:08:47.506]A few possible explanations that I can think
[00:08:49.780]of is that skills from OJ
[00:08:51.170]and PT might be transferable to a certain extent
[00:08:53.830]and that's why we're see poaching externality
[00:08:56.110]at play with hires
[00:08:57.440]and quits are both positive and significant,
[00:08:59.581]or simply maybe workers
[00:09:01.784]are just changing jobs resulting to wage growth.
[00:09:05.085]That could also be a possible explanation.
[00:09:07.822]And this is to the extent
[00:09:10.012]of my analysis so far.
[00:09:11.596]I thank you for listening.
[00:09:14.414]Lastly, I'd like to thank Dr. Christopher Mann
[00:09:16.960]for his guidance on the analysis
[00:09:18.840]and interpretation of the results
[00:09:20.269]as well as UCARE for making this possible
[00:09:22.290]and providing me with this opportunity as a whole.
[00:09:25.320]Thank you.

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Human Capital Growth and Labor Market Flexibility

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