Acquisition of Skills and the Performance of the Economy - Assignment Example

Analysis of Business Environment Question one: Discuss the evidence for the link between the acquisition of skills and the performance of the economy The issue of how skills levels contribute to economic development or productivity in a country has been a very contentious one. Most people believe or argue that skills acquisition is the baseline of economic development. The UK government has also been on the fore front in stressing the purpose of training and skills development as an avenue towards increasing productivity performance across the entire economic sectors, (Bowen et al. 2003, pp.376). This first part of this paper explores inwardly the impacts of skills on a country’s productivity. The association between skills and productivity levels is a positive one. The treasury has since the year 2001 placed a lot of focus on the employee’s skills alongside competition, innovation, investment, and enterprise as the chief driver’s of a country’s economy. Skills contributes directly to productivity, by increasing a nation’s or a company’s stock of human capital. Indirectly, skills contribute to the economy through the spill-over method. That is, those who acquire skills motivate others to acquire skills, thus leading to the overall increase in productivity. Human capital is probably the most important, yet ignored, method of building competitive edge for companies today. Every other organization is trying to outdo one another in terms of talent and innovation. This signifies that human capital forms the utmost important assets to the firm, and that at no any one time should they be overlooked. (Bowen et al. 2003, pp. 380) explores the evidence that accrues as a result of training and skills both to individual companies, as well as to the entire economy that undergo training. He further investigates the relationship between acquisition of skills and the overall business performance. He highlights the magnitude levels that skills contribute to business performance. Other factors such as human resource training and practices are also considered to impact the performance trend (Davis 2007, pp. 56). He therefore concludes that organizations should have the willingness to part with part of their budget for human resource training programs. Organizations, according to (Davis, 2007, pp.56) should offer tuition reimbursement programs aimed at boosting their employee’s morale in joining training. The employment of intermediate skills levels in the UK industries contributes to the country’s a fifth of the productivity gap between France and Germany. France and Germany workers productivity gap between their counterparts in Britain is 20% and 13% respectively. Skills too, play a crucial part in the remaining gap. For instance, capital investment is dependent on labor force skills for its proper use; and innovative is an indication of labor force skills. Again, this is an indication that the improving skills level is likely to influence in the positive direction, UKs productivity levels. (Aggarwal 2010, pp. 61-70) analyzes the input of skills to productivity and discusses the skills relationship between economic strategies and skill formation of countries. Political force and economics according to (Aggarwal 2010, pp. 61-70) and technological advancements have contributed widely to accelerating globalization. Globalization implies the integration of societies and economies caused by new economic relationships, new technologies, and the international and national policies of multiple actors. A point worth noting is that all these factors discussed by (Aggarwal 2010, pp. 61-70) relates to skills development. Technological advancements and economic growth, results from high skills levels apparent in our modern societies. Productivity growth can reduce poverty and raise income in a virtuous cycle. It reduces production cost and raises returns on investment causing an increase in business productivity. Consumption and employment grow, prices reduce, and people’s poverty levels reduce. What is the Mechanism, and how does it Work? According to (Cosh et al. 2003, 54) most businesses that offered their employees training programs associated the increased profit margins to the initiative. Information collected from the Business Survey of Employees in 2004, showed that employees who happened to have undergone through a training program organized by their firms were full in praise of these initiatives. They cited acquisition of skills as their chief achievement from these the programs. From the sample of employees questioned, a massive seventy five percent of the employees agreed to these assertions. The other twenty five percent associated increased in productivity level as the prime achievement they acquired during the training programs. In a similar study, conducted by (Spilsbury, 2002, 54) 65% of employers that provided training programs to their employees gave a nod to the initiative. They had no regrets due to finances used, but their praises were evident in the increased productivity levels from their employees. Half of the employers taking part in the study attributed the trainings to the increased productivity level. To others, employers, the training programs made hallmarks in the turnover levels. (Spilsbury, 2002, pp. 65) concluded that all sectors appreciated the training programs to employees on their productivity levels changes. We cannot make the same conclusion regarding the increase in profit margin. This is attributable to the rationale that not a very large proportion of the participants of the studies collected echoed to this finding. An overall analysis of the effects of skills and productivity varied from sector to sector. For instance, a half of employers in the consumer and distribution sector attributed the positive effects on profitability to skills. Only a 35% proportion and 33 % in both Agriculture, and business and finance services sector respectively the findings. A similarity between the effects of training and the impact on the magnitude performance was, in addition, eminent. Firms especially those with sound human resource policies highly increased their productivity levels. Firms should apart from only providing training, provide an appropriate working environment for their employees. Effective measures should be mixed with appropriate policies to boost the employees morale, and hence productivity. Such measures also work magic in increasing the labor retention rates. What is the evidence with regard to the UK in terms of the level of skills in the workforce in comparison to our main rivals? Across the OECD, the variances between countries in the human capital aid weightily to explain the disparities in economic growth. Apart from exposure to trade or trading activities, skills are the only other way through which a country may improve its economic position. Especially in UK the skills levels contributes a lot to the disparity in economic growth between her key competitors. A research conducted in several countries indicated that a one percent increase in school enrolment level at the elementary levels had the capability of increasing a country’s economic growth rates by 3%. Additional secondary school enrolment in a year resulted to a one percent increase in economic growth. (Karmel, 2006, 86) In their study proved that increased enrolment in secondary schools between 1960 and 1985 contributed to an annual 0.6% increase in productivity levels in UK. The study indicated that education enrolment levels increase was just one of the three main variables that affected the country’s productivity. Research indicates that organization’s with a rigorous staff recruitment and training programs records high performance than those that hires unskilled labor force. Most of the fortune companies have either extra or average skills levels labor force. These organizations too offer good terms of service to retain their on-high demand, experienced labor force. (Haskel et al. 2003, pp. 69) in a research conducted to determine the skills level of employees in organizations indicates that, employees in productive firm’s posses 10% higher skills than their counter parts in lowly ranked organizations. The skills gap, according to the study, contributed to a productivity gap of 10% between the bottom and top organizations. The gap is attributed to the fact that skilled labor force is more innovative and applies more complex production processes leading to the big variance in productivity between the bottom and top firms. Skilled labor, in addition, produces higher value products and higher quality goods than those firms deficient of skilled labor. High performing organizations, therefore, hire employees equipped with higher skills – both ‘hard’ technical skills as well as ‘soft’ generic skills. Evidence for International Comparison The service sector suffers from similar effects according to reports. (Mason and Wilson, 2003, 69) Concluded that an extra year of skills addition in service and manufacturing labor force, in the UK industries, increased each organization’s productivity, (Mason & Wilson, 2003, 98). This research’s findings proved that addition skills levels contribute to a productivity increase of between 4.5% and 8.5% in the manufacturing industry. The same study indicated that skills had the capacity to increase productivity levels in the service industry by a margin of between 6.0% and 12.7%. The strong correlation between skills and productivity receives further support from Neuman & Zuberman’s work done in 2002. He supports that productivity and production of quality products goes along with skills levels. NIESR conducted surveys in the 1980s and 1990s to predict the pattern between skills and productivity. The study compared hotel sectors, furniture manufactures, chemical, clothing, food and engineering sector in the UK with similar firms in competing countries. Productivity gap between 20% and 60% was evident compared to Germany, France, and Netherlands. The effect of employee’s development and skills on productivity level was given focus along other multiple factors like investment in capital assets and maintenance activities. A direct link between higher productivity and higher skills was eminent, particularly at those organizations that hired low skill levels workforce. The higher than average workforce productivity levels in other parts of Europe were connected to levels of knowledge and higher skills. In the UK manufacturing sector, low skills levels proved to result to a negative and direct effect on labor productivity. They also directly and adversely reflected the kind machinery the workforce employed, adoption to new technology, and the way the machinery were employed. A prolonged study of the sector trends skills and productivity indicated that industries that employed skilled personnel recorded high growth in their productivity (O’Mahoney et al. 1999). A positive relationship between productivity growth and intermediate skills level was also eminent. Sectors that stressed the increased use of skilled labor force were also noted to have recorded faster productivity growth. A close look at the automotive sector in Germany and UK showed that Germany’s high use of skilled labor force placed her ahead of UK, a country that did not put a lot of emphasis in employment of skilled labor. Major disparities in levels of qualifications and investment in human capital too proofed a reality. From their study of similar industries in countries grouped in the same economic development levels, NIESR, proved that most disparities in UK productivity were as a result of disparities in skills and human capital investment (Acemoglu & Pischke 1998, pp. 539-572). The research findings finally concluded that a fifth of the productivity gap between UK and Germany manufacturing sector could be attributed to UK’s prevalent poorly skilled workforce. A study conducted by (Griffith 1999) associated the high productivity levels in Foreign owned plants in UK relative to that of the locally owned plants to both superior skills and capital inputs. (Griffith 1999) shows that this is a common feature across multiple manufacturing sectors. Apart from the positive association between skills and productivity discussed above, high skills have, in addition, other advantages on other sectors of the firm’s operations. A skilled labor force was also associated with appropriate marketing strategies that ensured their firms maintained their competitive edge. These strategies also ensured an organization’s chances of survival in the market. Firms with high skilled labor force similarly indicated high innovation levels (Griffith & Simpson 2000, 96). What course of action could be taken?  There are various techniques that both employers and the government may employ, given the already discussed the importance of skills to impart skills to their labor force. The government should first ensure the provision of basic education to all its citizens. I will include university education among the basic education category. Due to the increasing demand in acquisition of higher education, the government must come up with ways that will ensure citizens meet the cost of education. This may be achieved through the provision of government subsidies aimed at cutting the relatively high cost of achieving higher education. This will ensure more enrolment levels, and thus increased productivity. The government should also implement ways of ensuring the retention rates in schools remains high. Such measure like provision of school milk to elementary kinds could be employed as bait. The teachers pay package should, in addition, be addressed soonest possible. Indirectly, this will contribute to an increase in the overall quality of education and hence productivity. Increase in the teacher’s salaries will reduce the high labor mobility apparent in the teaching profession. This will as well boost the teacher’s morale alongside their self-esteem. The government needs also to conduct more sensitization campaigns on the importance of education in the society. Best tools to use here is the use of the local media that has a high coverage across the country. A must do thing by the government is the improvement of schools infrastructure. More resources should be channeled towards improvement of infrastructures, and especially modernization of the school’s facilities. The government education agencies should benchmark with other highly developed countries in their systems of education. This will help the country to improve in areas found wanting after the benchmarking exercise. Not only should the government benchmark in the education sector, but other sectors, as well. To the employers, productivity is a result that they all aspire to gain. Ensuring the recruitment of the appropriate labor force is extremely important. Employers should also ensure that they offer refresher trainings to their employees. This helps the employees in keeping abreast with the developments in their fields. It was evident that most employers, from the above discussed findings, supported training programs initiatives. Most of them agreed that the technique contributed heavily in the productivity increase of their businesses. As a support of training programs initiative, employers currently offers tuition reimbursement programs to workers. The programs assist the employees to acquire training from their schools of choice, and any tuition fee resulting gets catered for by the employers. This arrangement has received enormous support or following currently, and most employers apply this strategy. Tuition reimbursement assists employees to acquire high education and thus increasing their skill levels. Some of the beneficiaries of the program were in full of its praises. They said that they would not hesitate even an inch in advising other employers to follow suit. Employers should also provide sabbaticals to their employees. These kinds of arrangements help the employees to have enough time to undergo their studies. After the training, employers should also be transparent in awarding promotions. Promotions should only be based on merits as a way of encouraging the employees. To guarantee economic growth, the country must adopt a learning culture. Countries with a good learning culture benefits from increased productivity. From the above analyzed studies, the importance of skills is far and wide. The government and other stakeholders in the country should thus ensure that the population gets equipped with appropriate skills. This could be through such means like channeling more resources towards education, and construction of more learning institutions. Question Two: Should bankers get big bonuses? Discuss this question in the light of principle-agent theory A current issue of debate is the way broker-dealers, fund managers, and bankers exploit the institutional investors. On their part, the bankers, broker-dealers, and fund managers believe that their special skills warrant them the rights to receive the high bonuses the institutional investors foregoes. Deficiency in these skills leaves the institutional investors with no options, other than parting with huge bonuses to the financial intermediaries. Of much irritation to the institutional investors, is the way that these financial intermediaries bear no risk in the investments. Whether an investor generates proceeds from their investments or not, payment of financial intermediary fee is not an option to them but rather it is an obligation. This is demoralizing to investors who invest primarily to generate profits and especially since these investments only earns revenue in the long term. The bankers act in the capacity of the promoters, and from the agency theory, it is apparent that agency problems may occur from time to time. The investors expect that the bankers should at all times safeguard their interest in the organization, and work towards maximization of their wealth. Unfortunately, this does not always happen. The bonus-minded bankers perpetrate their own interests aimed at earning more bonuses. This creates an agency problem between the bankers and the promoters. The bonus-hunting bankers remain accused of destroying their institutions financially. Irresponsible, foolish, greedy behavior and extreme risk-taking caused massive losses and the banking crisis, which is currently costing millions their employment and several, their homes. One wonders why bankers prone to such levels of failure should receive hefty bonuses. The financial crisis brought to the limelight the question and theory of bonuses policies in the economic sector. The terms ‘bonus’ and ‘bankers’ have become stained, and when used jointly, represents a trendy byword for irresponsible and excess behavior. Bonuses in the financial sector across the UK reveal an upward trend. A large sum of financial institution revenues comes from bankers bonuses. Banker’s bonuses issue has been closely linked with financial crisis that started in the year 2007. The issue has also raised the attention of the politicians, who feels that the banks reap abnormal profits from bonuses at the expense of the investors. The issue on the pay packages of bankers is as a result of a wider issue concerning “moral peril” that occurs as a product of bailouts. Major markets and financial institutions expect taxpayers to bailout bondholders and shareholders, during major losses that threaten the financial stability. This expectation is beneficial to employees and shareholders who get the guarantee of positive returns in their investments. To the taxpayer, it is pinching since it is the taxpayers who are called upon to bailout financial institutions that experiences financial difficulties. The moral hazard problem indicates that, while the bankers’ bonuses remain a point of focus from regulators and politicians, it is one of those areas that should be targeted in ensuring the country’s financial stability (IMF 2010, 44). Debates have it that the huge bankers bonuses contributed to the financial crisis in UK and other parts of the world. Really, did the bonuses contribute to the financial crisis? Bonuses are generally attached incentives to encourage employees to improve their performance levels. In other sectors of the economy, the award of bonuses is closely monitored, and only managers who meet the laid down procedures benefit from these bonuses. This is contrary to the financial sector where employees have the assurance of obtaining bonuses regardless of the performance levels achieved. In the financial sector, bonuses encourage investors to take high levels of risks with assurance of high levels of returns, (Dorn, 2008, 239). The aspect of risk taking is a common one in the financial sector; this necessitates the reason behind associating performance with the pay level. The issue of bonus payment increased with the banks introduction of policies aimed at providing low interest rates to their customers to attract investors. The result was that the policy led to increased leveraging and risk taking among investors. This was particularly so with investors who only invest in the money markets, and do not find the need of investing in the capital markets. The remuneration of bonuses in the financial sector should be altered and be attached to performance. This will ensure that the bankers and other financial intermediaries do not convince investors to take bogus decisions on investments. The mix of equity and cash in bonus remuneration has been pinpointed as a vital area for regulation and reform. It is worth noting, though majority of investments banks pays bonuses along restricted equity and cash. A typical example is an instance where a bank may opts to pay its employees $500,000 in both restricted equity and cash evenly. Most banks prefer paying more bonuses in cash form than in equity form to mitigate loss of control. Such arrangements assist financial institutions in retaining their labor force. The equity bonuses are distributed over a period of time during which employees must service the firm to receive the bonuses. Clawback Arrangements in Bonuses These are arrangements made between parties in a transaction, to only pay dividends if certain preset criteria’s are met. These arrangements, if adopted in the financial sector may prove essentially helpful in the reduction of the problems associated with bonuses. The measure has already been implemented by UBS bank that clawed back its employee’s bonuses when they failed to meet the required conditions to earn bonus. There are also suggestions looming to increase the margin tax rates for employees earning high bonuses. Taxation of banker’s bonuses will ensure the equal distribution of resources in all sectors of the economy, (Dorn, 2008, 536). Increasing the marginal tax rates for banker’s bonuses faces two major problems. First, the change in tax rates may increase the cases of tax evasion thus reducing the country’s tax base. The second drawback to this initiative is as a result of the high labor mobility levels apparent in the financial sector workers. These employees, because of tax planning exercise, will find all means to avoid the high marginal tax rates. The method may fail to achieve the target results for which they are intended. In conclusion, the financial crisis brought to the limelight the issue of hefty bonuses for bankers. These persons have been the main beneficiaries, and have largely expanded their revenue base. Bonus idea has faced numerous criticisms due to its alleged increase in risk taking to incredibly harmful levels and led to financial crisis in 2007. Appropriate and effective measures should be implemented aimed at tying bonuses to performance. The government should also consider increasing the bonuses marginal tax rates as a macroeconomic policy aimed at stabilizing the economy. An individual’s skills levels and productivity, according to various studies conducted proofed that the two shares a close correlation. Countries that employs average and above average skills in their labor force records high levels of performance. Skills levels also influence other facets of an organization positively, and lead to an increase in an organization’s overall increase in productivity. Organizations should thus as a matter of principle, hire highly skilled labor force. 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