Skills, Tasks and the Scarcity of Talent in a Global Economy

• Author: Michael Koch
• DOI: http://doi.org/10.1111/roie.12222
• Published date: 01 August 2016
• Date: 01 August 2016

Skills, Tasks and the Scarcity of Talent in a Global

Economy

Michael Koch*

Abstract

The scarcity of talent is a tremendous challenge for firms in the globalized world. This paper investigates

the role of labor market imperfection in open economies for the usage of talent in the production process

of firms. For this purpose, I set up a heterogeneous firms model, where production consists of a continuum

of tasks that differ in complexity. Firms hire low-skilled and high-skilled workers to perform these tasks.

How firms assign workers to tasks depends on factor prices for the two skill types and the productivity

advantage of high-skilled workers in the performance of complex tasks. I study the firms’ assignment prob-

lem under two labor market regimes, which capture the polar cases of fully flexible wages and a binding

minimum wage for low-skilled workers. Since the minimum wage lowers the skill premium, it increases the

range of tasks performed by high-skilled workers, which enhances the stock of knowledge within firms to

solve complex tasks and reduces the mass of active firms. In a setting with fully flexible wages trade does

not affect the firm-internal assignment of workers to tasks. On the contrary, if low-skilled wages are fixed

by a minimum wage, trade renders high-skilled workers a scarce resource and reduces the range of tasks

performed by this skill type with negative consequences for the human capital stock within firms. In this

case, trade leads to higher per-capita income for both skill types and thus to higher welfare in the open

than in the closed economy, whereas – somewhat counter-intuitive – inequality between the two skill types

decreases, as more low-skilled workers find employment in the productionprocess.

1. Introduction

The organization of production within firms is a key determinant of firm performance.

The ability to allocate scarce resources within the boundaries of firms in an efficient

way is essential for firms to compete in modern economic life.

1

In recent years, the

assignment of skills to tasks within the boundaries of firms seems to deteriorate,

because of a growing mismatch between the skill needed in the production process

and the talent available in the labor market.

2

Due to the scarcity of talent (and thus

skill), firms must hire candidates that are under-qualified for the job, “just to fill a posi-

tion quickly” (The Economist, 2006, p.139). This has negative consequences for a

firm’s productivity and competitiveness.

3

While there might be several reasons explain-

ing the prevalence of skill scarcity, one of the major driving forces is globalization,

because economic integration has increased the demand for high-skilled workers sig-

nificantly (see Beechler and Woodward, 2009). With just a rudimentary presentation

of the production process, most of the existing trade models are not well equipped to

analyze the scarcity of skill with its negative impact on firm’s human capital stock and

the hereby induced affects on firm productivity. Therefore, this paper takes a new

approach and introduces the idea of a task-based firm-level production process into an

otherwise standard model of the new trade theory. Modeling the assignment of

* Koch: University of Bayreuth, Department of Law and Economics, Universit€

atsstr. 30, 95447 Bayreuth,

Germany. E-mail: michael.koch@uni-bayreuth.de

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C2016 John Wiley & Sons Ltd

Review of International Economics, 24(3), 536–563, 2016

DOI:10.1111/roie.12222

workers to tasks and a discussion on how this assignment changes in an open economy

is in the center of this paper’s interest.

I model the task-based production process along the lines of Acemoglu and Autor

(2011) and assume that firm output is assembled from a continuum of tasks that differ

in complexity. For the performance of tasks, firms can hire low-skilled or high-skilled

workers. High-skilled workers are more productive than low-skilled workers in the

performance of all tasks and their relative productivity increases with the complexity

of tasks. How firms assign skills to tasks depends on the productivity advantage of

high-skilled workers and their skill premium. Changing a firm’s human capital stock

by altering the range of tasks performed by high-skilled workers, firms do not only

affect their labor costs but also their productivity, as the efficiency to solve complex

problems is skill specific. To determine the optimal skill range, to manage the firm,

and to organize the complex production process, firms need a fixed input of high-

skilled workers. I embed this framework of task-based production into a trade model

along the lines of Melitz (2003) that features monopolistic competition between heter-

ogeneous firms. Heterogeneity arises due to exogenous differences in total factor pro-

ductivity, and I analyze to what extent this heterogeneity affects the firms’ decision

regarding the assignment of workers to tasks.

I start with a characterization of the closed economy and consider perfectly flexible

wages as a benchmark of my analysis. I then investigate the consequences of labor

market imperfection for the firm-internal assignment of workers to tasks. I capture

labor market imperfection in the simplest possible way and consider minimum wage.

The minimum wage is only binding for low-skilled workers and leads to involuntary

unemployment of this skill group and lowers the skill premium.

4

While the effects on

unemployment and inequality would also be active in a framework with an exogenous

fixed share of high-skilled workers in a firm’s production process, in this framework

firms now respond to the higher skill premium by assigning high-skilled workers to a

broader range of tasks. As more (complex) tasks are processed by high-skilled work-

ers, this increases a firm’s efficiency to solve problems that arise throughout the

production process and thus increases its firm-level productivity. Moreover, the

endogenous assignment generates a spillover on firm entry as less resources are left

for overhead services, thereby enforcing firm exit. Welfare declines and both skill

groups end up being worse off in terms of their per-capita income after the introduc-

tion of the minimum wage. The relative income of high-skilled workers increases, so

that the minimum wage widens the income inequality in this model.

5

Under both labor market regimes the heterogeneity between firms does not affect

the assignment decision, since all firms are price takers in the labor market and pay

the same wages. This implies that the revenue ratio of any two firms is fully character-

ized by the (exogenous) differential in total factor productivity, a feature that is well

known from other trade models with heterogeneous firms. Thus, my model is not

equipped to shed new light on self-selection into exporting, and I abstract from any

trade impediments in the open economy situation to focus on those aspects of the

model that are new to the literature.

6

Being interested in the firm-internal adjustment

to the globalization shock and its consequences for key macroeconomic variables,

I assume that all firms are affected symmetrically. To be more specific, I abstract from

any (fixed or variable) shipment costs and assume similar to Krugman (1980) that all

firms end up being exporters in the open economy. Firms expand their demand for

both skill types in order to serve foreign in addition to domestic consumers. In a

situation with fully flexible wages this does not affect the firm-internal assignment of

workers to tasks, while things are different when considering minimum wage. Whereas

SCARCITY OF TALENT IN A GLOBAL ECONOMY 537

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C2016 John Wiley & Sons Ltd