Don’t count on employers to be solution to upskilling & reskilling

Last week I shared data showing that many workers would change careers and expect to need additional education if they lose their jobs. But even before any potential job impacts from the pandemic, many workers wanted better jobs that would require new skills.

To address this, we’ll need to find ways to increase resources directed at lifelong learning. The chart below shows how education and training spending is extremely front-loaded within the average lifetime. That model suggests people can learn most of the skills they need when they are young and then just apply them throughout the rest of their life. But that doesn’t sound like a successful strategy for our current economy, much less in the future.

As I highlighted last week, there are many companies looking to help tackle parts of this problem.

1️⃣ Employers rethinking how they help workers reskill and upskill
2️⃣ New adult education providers focused on career switchers
3️⃣ New approaches to outplacement and career navigation

But these approaches are quite different—and not equally promising for workers, investors, or society. Some of these approaches suggest a hopeful idea that employers will be a big part of the solution. To understand how realistic that is, it’s helpful to get a clear understanding of employers’ incentives to invest in upskilling and reskilling and identify why they aren’t doing more already. (To clarify, this entire discussion excludes situations where there is a clear career progression that an employee can take advantage of over time, either through becoming more high-skilled in the same role or moving into management within the same function).

Employers have strong incentives to upskill and reskill their workers when the benefits of doing so exceed the costs of doing so. That’s a simplistic but a helpful starting point.

The costs are straightforward—they are just the incremental cost of the relevant training or education program.

The benefits (focusing only on the employer’s perspective here) can take several forms: The holy grail of reskilling is taking a worker in an entry-level, low-skill job and equipping them for a higher-skill, in-demand and hard-to-fill role at the same employer. A more moderate version of this would be increasing the productivity of the employee in the same or similar role.

This sounds fantastic—the employer addresses a labor shortage, the employee gets more skills and a higher paying job. Win-win.

But in practice the incentives usually don’t line up quite so neatly. In order for the employer to benefit from this, they need to save enough costs from this arrangement versus hiring externally to justify the education costs. To benefit more than just in saving one-time hiring costs, they need to pay the upskilled worker less than they would pay to hire someone for the role externally. But in that case, the employee would have a strong incentive to look elsewhere for a role at a different employer paying the market rate for those newly acquired skills. If the employer plans to pay the upskilled employee the market rate instead, there isn’t much benefit for the employer, which undermines the value proposition of paying for the upskilling in the first place. This can be partly overcome with employee obligations to stay at the company for a certain period after completing their training or education, but those have their own challenges from whether employees will be willing to accept them as part of a program to whether the company is willing to enforce them (I.e., suing a former employee who leaves early). Vesting schedules for things like stock options can also mitigate this effect but are rarely in the picture for the types of roles being discussed.

Other factors at play are also not trivial. The employees who make promising candidates for upskilling need to be located in the same geography that the employer’s high-demand roles are or be willing to move (which is relatively unlikely given the low geographic mobility of Americans today). For many employers, their existing workers are spread out in different areas from where their in-demand roles are. More importantly, not all employers have vast numbers of in-demand high-skilled job demands, even before the pandemic.

Risk and uncertainty also create problems for the cost-benefit tradeoffs involved. Many companies don’t have a high-confidence view of their workforce needs in three or four years’ time. A recurring theme at Remixing Work is the high degree of change in the broader economy and in industry structure. A company’s uncertainty about these factors going forward, as well as uncertainty around its own strategy and performance all flow through to uncertainty about future workforce needs. This is a significant problem in this context because the costs are effectively guaranteed, only the benefits are uncertain.

Sometimes the benefits are high enough, the uncertainty is low enough, and the issue of retaining employees can be overcome. But as a result of these complications, the incentives generally work against significant employer spending for upskilling along these lines.

There are some alternative rationales that justify employer spending in certain cases that I will come to in a moment, but it’s important to emphasize that the above discussion only shows that it will not make financial sense for employers to spend substantially on upskilling low-skilled workers in many cases. However, that does not at all reflect the cost-benefit trade-off from society’s perspective or from the workers. But we shouldn’t look to employers as the primary solution for upskilling (unless we change their incentives through laws or regulation).

So, what about the alternative rationales I mentioned? The most promising of these is illustrated with an example I highlighted previously: the major employers who are providing their employees education as a benefit through Guild Education.

Guild has primarily built their early business around a totally different logic for employer-funded education They have focused on employers in industries with very high employee turnover. Looking at pre-Covid-19 conditions, turnover for hourly workers in retail is commonly in the 50-75% range, and, at fast-food restaurants, it can be 130-150%. This means the typical employee stays less than a year, which implies a huge amount of time dedicated to hiring and training workers. But employees who enroll in employer-sponsored or subsidized education programs are likely to stay years instead of just months. This truly is a win-win and can make a real contribution to upskilling employees. At the same time, it’s important to realize that the actual education is somewhat besides the point from the employer’s perspective-the main benefit is the increased retention. More importantly, this logic only works for some employers in some situations. Employers that don’t face high turnover won’t have the same incentives.

Training our workforce for a changing economy is an important challenge. But we shouldn’t expect employers to solve the workforce’s upskilling needs under the current incentives. There are interesting models that could be considered, for instance, creating incentives for apprenticeship-style programs for career switchers within an employer. Furthermore, startups looking for a market opportunity in the current skills gap will need a clever orthogonal model like Guild’s or a very targeted model to succeed.

But we should also look beyond employers to support and encourage workers more directly. There is a huge opportunity to better serve career switchers and other adult learners directly with education offerings. Part of the solution is new education programs different from what are widely available now. But a big part also needs to be better support for working adults to be able to take advantage of education programs. Innovative financing like ISAs can significantly help. More supportive government regulation and financial support may also be appropriate.