The Financial Times

Weighing workers' worth
Older employees will find little joy in studies of human assets, says Ed Crooks
Published : Nov 06 2001 17:49:26 GMT | Last Updated : Nov 06 2001 19:29:52 GMT

"Our people are our greatest asset." No matter how much the sceptics scoff, corporations and governments just cannot stop making that claim.

The idea, presumably, is to make people feel valued and nurtured but the implications are not necessarily reassuring for the human assets concerned.

If people are an asset, like every other asset they should be made to sweat. And if they are not delivering a satisfactory rate of return, they should be scrapped. As Emo Philips, the US stand-up comic, put it: "The president says our children are our greatest natural resource . . . Let's pray it doesn't come to that."

The analysis of human capital has become one of the hot topics for economic research in recent years. Gary Becker of the University of Chicago won his Nobel Prize in 1992 for his pioneering work on human capital, among other things, and James Heckman, one of last year's Nobel winners, has also written extensively on the subject.

Managers, too, have come to focus on human capital, as manufacturing industries that depend on physical capital have been in decline, while service industries that depend on skills and innovation have grown.

A paper* by Stephen Redding of the London School of Economics, Stephen Nickell of the Bank of England's monetary policy committee and the LSE, and Joanna Swaffield of the University of York in northern England looks at how differences in educational attainment can explain differences in industrial structure between countries.

In Britain, for example, a rise in the proportion of the male workforce with a degree or equivalent seems to have been a significant factor behind the growth of Britain's financial services and other service industries such as communications.

But the relationship between human capital, production and employment is not always straightforward. A fascinating study** on the economics of "has-beens", by Glenn McDonald of the Olin School of Business in St Louis and Michael Weisbach of the University of Illinois, considers the impact of technological change on human capital.

Throughout history, as medieval scribes and 19th-century weavers learnt to their cost, technological advances have raised the value of some skills and undermined others.

Older workers, with less of their productive lives left ahead of them, will more often than younger workers find that it will not pay them to spend the time and money needed to acquire new skills. If the impact of technological change is strong enough, they will find their experience and skills acquired over their working lives are worth less than the new skills acquired by the young. They become has-beens.

MacDonald and Weisbach consider an example of a profession in which exactly this phenomenon has occurred: architecture.

The skills required by an architect, as they describe them, have traditionally been creativity, engineering knowledge and draftsmanship. Computers, however, have revolutionised the process of building design, making the drafting and engineering work much easier.

Younger architects, who are more comfortable with computers, are better suited to the new ways of working than older architects, who find their drafting and engineering skills increasingly redundant.

The result, as shown in the US Census of Population and Housing, is that younger architects earn more. In 1990, the average annual income of a white architect with a bachelor's degree was more than $130,000 for those aged 25-34 but only $100,000 for those aged 45-54.

For lawyers, by contrast, the average earnings of the older group - more than $82,000 a year - were roughly double the earnings of the younger group.

In some occupations where relative incomes decline with age beyond a certain point - professional sport, for example - the result is an increase in early retirement. For architects, it seems, that is generally not an option: the has-beens decide to stay in work, despite being overtaken.

Some common employment practices can be explained in terms of this framework. The custom of the annual pay rise and the practice of academic tenure are ways by which individuals can protect themselves against some technological risk.

For companies that have traditionally valued human capital highly, the phenomenon of has-beens creates particular difficulties. A business that wants to develop its employees' company-specific skills will have offered them incentives to stay put: a pay scale that rises steeply with age, a defined-benefit pension based on final salary and sometimes an implicit or even explicit offer of "a job for life".

If technological change renders those old skills redundant, employers may be forced to abandon those personnel policies and break the implicit contracts with their employees. MacDonald and Weisbach cite Eastman Kodak and Xerox as examples of companies that have had to wrestle with this problem.

One of the themes of optimistic human resources consultants is that human capital can always be upgraded by training; that old dogs can always be taught new and more profitable tricks. Sadly, it seems that in real life that is not always true.

* Educational Attainment, Labour Market Institutions, and the Structure of Production, S. Nickell, S. Redding and J. Swaffield, Centre for Economic Policy Research Discussion Paper 3068 (forthcoming) ** The Economics of Has-Beens, G. MacDonald and M. Weisbach, National Bureau of Economic Research Working Paper 8464 September 2001