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Skills and global value chains: a story of winners and losers

📥  Business and the labour market, Economics, Education

Professor Hugh Lauder is Professor of Education and Political Economy at the University of Bath

Two weeks ago, the OECD launched the newest instalment in its biennial Skills Outlook series, which focusses on the impact of skills and education on economies and employment in OECD countries.

OECD Skills Outlook 2017: Skills and Global Value Chains broke new ground for the OECD in that it reported the relationship of skills to the global economy. This is the first time that the organisation has extended its analysis of skills to the global economy: in the past, it has focussed on national competitiveness through education and skills, but here the focus was on the role of skills in the development of global value chains.

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There were two key messages to the report: firstly, that a skilled workforce enables countries to compete for work in global value chains and, secondly, that there would be winners and losers in that competition – workers who are less skilled, in particular, are likely to remain excluded from the global economy.

Policy challenges

There are a number of problems that national governments have to confront when thinking of policies that relate to global value chains. The primary problem is that, in many sectors, global value chains are footloose: transnational companies will always shift their supply chains to wherever they can find a cost advantage – and where technology can be substituted for workers, however skilled, technology appears to win. Two good examples of this come from the manufacturing and service sectors, respectively. First, much of East Asian manufacturing is based on low-skilled assembly work – but with the advent of smart factories, workers are no longer needed; they can be replaced by robots. The announcement by Adidas that it will establish such a smart factory in Germany is a straw in the wind, and will raise fundamental problems for the strategies of developing countries. An example from the service sector concerns the discovery work that was once undertaken in London and New York by young lawyers, who were paid high salaries. That work was subsequently offshored to lawyers in developing countries where it could be done at a fraction of the price the same work would cost in Western capitals. Now, that work is undertaken by the use of algorithms.

As Phil Brown, David Ashton and I argued in our book The Global Auction, employers do not wish to pay for brain power and skill if they do not have to; it is too expensive. The error here is to believe that we live in a knowledge economy, when it is actually knowledge capitalism that drives the strategies of cost reduction.

This is not to reject the importance of education and skills, which we should avoid doing for two reasons. Firstly, without skilled workers, small and medium enterprises that may become corporations in the future will not be able to enter the market. In emphasising skills, therefore, we need to build industrial policies within countries that enable fledgling enterprises to flourish. Skills may also be needed as an insurance policy, however, a form of resilience when transnational companies decamp from one country to another in the search for cost advantage, or when new forms of technology make firms unviable. Costa Rica developed a skilled workforce to attract Intel, for example, and for a while the strategy worked – but then Intel exited to Vietnam, where labour was cheaper. In Finland new technology from Microsoft made the Nokia phone redundant, with resultant job losses – although the company is now seeking a comeback. In both cases, the host countries were hit hard. What we don’t know is whether having skilled workforces will enable these economies to be resilient in recovering from these meteorite-like shocks.

A timely report

The OECD’s new report has involved considerable cooperation between Andreas Schleicher, Director of Education and Skills, and Andy Wyckoff, Director of Science, Technology and Innovation – as well as their respective teams. The extension of skills analysis to global value chains is a major breakthrough for the OECD and for the international research and policy community.

The report was launched at an event in London with support from the Institute for Policy Research (IPR), and included a panel discussion in which I participated, alongside Torsten Bell of the Resolution Foundation, Toni Fazaeli of the Institute for Learning and both Wyckoff and Schleicher. It was a productive discussion, and touched on many of the points raised above.

But there were some important concerns that weren’t discussed explicitly at the launch, although their shadows loomed large over the debate. The political implications of the role of global value chains are a crucial consideration, particularly in the context of Brexit and the rise of nationalist parties across the Western world. It is not only the attempts of transnational companies to cut costs that pose a threat to policymakers: economic nationalism can do the same, and a hard Brexit may see the breakup of global value chains in motor manufacturing as well as in services.

In this respect, the OECD report could not be more timely. To undertake research of such complexity required an organisation with the resources of the OECD and this report is, therefore, to be welcomed.

You can read more about the launch event in the IPR's coverage here, and the OECD report can be downloaded here.

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