Friday, February 17, 2012

Are incentives really so hard to set up?

There has been a lot discussion about a recent Yahoo Finance article about the shortage of machinists.  Several solutions have been proposed, including Karl Smith pointing out that raising wages would do miracles in increasing supply.  But it is Matt Yglesias who really has the most common sense reponse to this issue:
So we should expect underinvestment in training of entry level workers absent some special arrangement like the TAP Writing Fellowship conceit. But it seems to me that to the extent that the training is transferrable the employee is gaining something of real value, and the employer now has the ability to reduce cash compensation accordingly. Employers need to choose between paying a premium for already-trained workers, or paying lower wages to less-trained workers but bearing training costs. But either approach is perfectly viable.
So when would an employer not want to pay training wages? When they are convinced that the current demand is very short lived, is about the only thing I can come up with. In this case, the employer in the Yahoo article wants a skilled work force with flexible employment standards (i.e. willing to work in the short term), and not pay premium wages.

After all, it is not worth it for a young person to take a college program as a machinist today in the hopes that they would be employed for a short time at low wages tomorrow. The Karl Smith approach (outbid rivals and triple the wages) would make the positions sufficiently lucrative that some people would take the gamble that the wage bubble was a secular shift (and others, with the skills but employed elsewhere, might come back due to the high wages).

But the best path for the future is to develop a good policy for training. Sure, skilled workers often leave. But is it really that hard to build in retention incentives? Don't we do this for high level managers all of the time?

You might be amazed at what a $20,000 payout at the end of 2 years (or as a severance bonus if you are laid off before that time) would do to make the trainees "sticky".  Even if they were worried about losing their job, the bonus would make them wait out the uncertainty. 


  1. I wonder if this is connected to just-in-time approaches to inventory management. Managers have gotten into a get-it-when-you-need-it mindset.

  2. Mark: I think that this is the most plausible explanation. However, human capital is not like a factory -- if you want this type of flexibility then you have to pay higher wages. Otherwise it will be hard to convince people to undergo expensive and time consuming training for low wages/poor job security.

  3. Agreed. I think that simply taking business concepts from other areas and applying them to labor is generally a bad idea.