There is much concern in policy circles about the labor market consequences of automation and digitalization. Several studies have stressed the importance of re-training and up-skilling workers whose jobs are being affected by technology. Adult learning is often seen as a useful antidote to navigate the troubled waters of modern labor markets. Since a substantial share of training is employer-provided, it is important to understand whether and how the increased use of automation and digitalization technologies affects employers’ incentives to invest in the training of their employees.
In a new IZA discussion paper, Giorgio Brunello and colleagues address this question by using rather unique firm-level data that cover the 27 EU countries, the UK and the US and include information both on the use of Advanced Digital Technologies (ADT) and on training investment. They show that employers adopting these technologies have reduced their investment in training per employee, especially in countries where employment protection legislation is less severe or where public training expenditure as share of GDP is lower. The authors argue that the observed reduction is unlikely to reflect only a decline in the cost of training but is also a reduction in the percentage of individuals undertaking job-related training.
Substitutes in production
A mechanism explaining this result is that ADT and training investment per employee are substitutes in production, which implies that a higher use of the former reduces the marginal product of the latter. This could happen because ADT not only replace unskilled labor with capital but also modify the remaining tasks filled by labor in such a way that the productivity of training declines. For example, the remaining tasks could be more focused on social interaction and communication, requiring different types of training and often informal learning, which is not captured by data on training investment.
Firms using ADT could also fill the skilled positions associated with these technologies by hiring rather than by training in-house, thereby reducing training needs. This explanation would also be in line with persistently high shortages for digital experts observed on labor markets in recent years. Although average training investment per employee has declined with automation, total firm-specific investment has increased because of the positive employment effects.
The study shows that the decline of training investment per employee with digital use and intensity is typical of countries with a relatively low public training expenditure (as a share of GDP). In countries that spend more on training policies – which include subsidies to employers – employers’ training investment per employee does not fall with digital use or intensity.
Risk of widening inequalities
On the one hand, these results are worrisome with respect to countries where there is little investment in active labor market policies and limited investment in training by employers. Here, the risk of widening inequalities linked to digitalization might be most pronounced. On the other hand, the findings point to the potential of positive complementarities between public and private sector.
Where spending on active labor market policies focusing on training is higher, firms also appear more likely to continue higher levels of training investment. This is particularly important in the current environment characterized by automation and digitalization to foster re-skilling and up-skilling, not only because they provide training opportunities for the displaced and unemployed, but also because they stimulate employers to invest more.
The combination could help to maintain high levels of employment against the background of accelerating digitalization as it facilitates adaptation to changing tasks and ways of work within firms and offering those having lost their jobs better opportunities for labor market reintegration. Finally, the combination would raise skill levels across the workforces, thereby helping to mitigate skill gaps.