15 years later, I repeat my suggestion for Chinese training and labor mobility

When I met my soon-to-be-wife in 1994, I was studying economics, with a focus on labor economics. I quickly became fascinated by her country’s economy and language and hit on a topic I was sure would be of great importance to China: China’s schools were turning out few educated workers, and the education the elite received was of mediocre quality. So, I intended to ask in my dissertation, how could China pay for employee training while enabling trained workers to move from company to company?

I discovered many firms in China were training employees but locking them into multi-year contracts as a requirement to receive training. (This even happened to my sister-in-law.) This was indenture. Without indenture, firms won’t provide expensive worker training because trained workers will leave for other firms that will pay them higher wages for their new skills (“poaching”). You can “solve” the problem of worker training through indenture, but this creates a separate problem: locking workers into a particular firm creates a seriously rigid, inefficient labor market. If workers are trapped in firms, they can’t go to whichever firm would make best use of their skills and knowledge (and pay them the most).

Silicon Valley, for example, has a ruthlessly competitive labor market. Skilled techies move to the Valley not to work for a particular firm but because they know they can always move to a more promising firm if their current employer’s prospects dim. And promising startups move to the Valley because they know they’ll be able to attract workers with the skills they need. Indenture prevents such worker mobility, damaging promising startups and skilled workers. For this reason, I predicted a bleak future for China’s ambitions to become a tech superpower if it couldn’t encourage worker training without killing labor mobility. (I argued labor market rigidity was much less damaging in manufacturing, where skills and training are far more firm-specific.)

According to MIT business school professor Yasheng Huang — an expert on China’s economy — China still hasn’t solved the problem that grabbed my attention fifteen years ago. College students and workers aren’t learning/developing the valuable problem-solving skills employers need:

In my conversations with Chinese managers and entrepreneurs, they constantly complain about a shortage of people with the right set of skills, capabilities and inclinations. China is so short of the right human capital, and books with titles like, “War for Talent,” are best sellers in China.

The Chinese educational system is terrible at producing workers with innovative skills for Chinese economy. It produces people who memorize existing facts rather than discovering new facts; who fish for existing solutions rather than coming up with new ones; who execute orders rather than inventing new ways of doing things. In other words they do not solve problems for their employers.

Fifteen years ago, my suggested solution to the Training/Poaching problem was to document actual training costs and then amortize them so that any firm that hired a worker who received $10,000 training from Firm A at Time 0 would pay the training firm $8,000 if poaching that worker at Time 1, $6,000 if poaching them at Time 2, $4,000 if poaching them at Time 3, $2,000 if poaching them at Time 4, and nothing if hiring them at Time 5 or later. This scheme incents firms to provide valuable training while permitting economically efficient labor mobility. I suggested the scheme could be enforced through government-controlled pension systems.

I still think my scheme — which I don’t think even made it into my dissertation because my advisor told me to cut several chapters, including this one, I believe — is a good idea.

Posted by James on Monday, March 08, 2010