(Reprinted from HKCER Letters, Vol. 19, March 1993) 

 

Retraining the Unemployed in Hong Kong

William Chan

 

Government involvement in the retraining of unemployed workers is not new, even in Hong Kong, where, at least until recently, the government has followed a long-standing policy of nonintervention in the labor market. Yet it has always been limited, with much of the initiative left to quasi-independent and private agencies. The structural transformation of the Hong Kong economy, which accelerated in the past few years, has changed this. With an acute labor shortage in a number of fast-expanding, mainly service industries, and the resulting pressure on wages and prices, the Hong Kong government has adopted a policy of labor importation to relieve tightness in the labor market. To make this policy lore palatable to domestic workers and unions, and to address the problem of rising unemployment among declining industries which have relocated north of the border, the government has offered to greatly expand its role in retraining the so-called displaced workers, with funding from a levy on firms importing labor, as part of the policy package.

The Rationale for Government Intervention

It should be pointed out that publicly funded retraining of workers is difficult to justify on purely efficiency grounds. The benefits of retraining a worker are accrued almost entirely to either the worker himself in terms of higher wages (because of greater skill), or his future employer(s) in terms of lower wages than otherwise (because of a larger supply of trained workers), or, most likely, both. External benefits to society-at-large are limited to secondary effects like lower welfare expenditures. Therefore, if such training is worthwhile, i.e., if the benefits from such training exceed the costs, then at least one party would have the incentive to pursue it even without government intervention. The failure of many displaced workers to promptly seek retraining and the general absence of private retraining initiatives targeted at these workers, either by employers on an on-the-job basis or by third party vendors on a proprietary basis, seems to indicate that such activities do not pay for these workers. If this is indeed the case, then the government would be investing in a socially inefficient project by funding these retraining programs unless its involvement can result in efficiency gains over the private sector.

It is possible that the government has an edge over the private sector in certain aspects. In particular, the government may have more information about the individual workers who have been displaced, the firms who need to hire, and the available retraining resources. But even in this case, the appropriate strategy would be to pass along the information to the relevant parties so that the individuals involved can make well-informed choices of their own. It is also possible that some workers may be liquidity constrained: They lack the resources to pursue retraining even though it is worthwhile in the long run, and the potential employers are unwilling to pay for it because of the lack of guarantee that the workers, once trained, would remain employed. In this case, the government can improve social efficiency by lending the workers the required funds for retraining. However, given the types of retraining that the government is considering, it is not obvious that the liquidity constraint is binding for many workers, even when time spent on retraining (and therefore not available for other market or household activities) is figured into the calculation. Also, government financing of retraining does not require repayment by the trainees. This inevitably distorts incentives and introduces offsetting inefficiencies.

Yet economic efficiency is not the sole criterion for public policy. The primary justification for the current government-financed retraining effort probably lies with its redistributive effect. It may be socially desirable to compensate those workers who lose their jobs simply because cheaper labor is now available in China. While retraining may not guarantee the same levels of wages as before, it at least makes those workers more employable, and the transition to a new career less painful. Again, students of economics would note that free retraining is a less efficient redistributive policy option than a lump sum income transfer to the beneficiaries, but the public may have a preference for the transfer to enhance the beneficiaries' earning power in the long run, rather than their immediate income, particularly if it can at the same time promote economic growth by increasing the supply of workers to industries strapped for labor.

The Government's Initiatives and Their Limitations

Even if a case can be made for the government's role in the retraining effort, it is still far from clear that the current system of program development and implementation is the most efficient approach to the problem. The main thrust of the government's initiative involves a significantly expanded role in the financing, development, and administration of retraining efforts. Using survey data that it has just begun to collect and compile, the government has to identify the declining industries and those among the unemployed who qualify as "displaced workers." It also has to determine the industries whose labor demand can be satisfied by retrained workers. And then, finally, to match supply with demand, it has to develop and finance training programs with the cooperation of existing agencies in order to equip eligible workers with the appropriate skills. The government is therefore playing a classic central planner's role, deriving information and making inferences from data, determining who is deserving of what type of training, and directing allocation of workers across sectors with, however, no guarantee that the retrained workers will eventually be employed.

With only a few of the pilot projects completed, the jury is still out on the efficiency of the design. But while preliminary official figures suggest an overall placement rate of about 85 percent, almost half of these are presumed to have found work because they did not use a placement service. Also, other sources closer to the grass roots report much lower retention rates, with far fewer workers able to remain employed in the occupations they are trained for. Individual courses also showed low placement rates even at graduation, indicating a mismatch between the employers' needs and the skills acquired through the program. At the current scale of operation, we can afford a certain amount of misdirection of resources. But when the scheme is implemented at full force in the near future, any inefficiency built into the system through the central planning process will result in welfare loss of an entirely different order of magnitude.

To be fair, not all cases of failure should be attributed to systemic flaws. The workers who are eligible for retraining are mostly middle-aged, not well educated, and probably with below-average labor force attachment and work ethics, qualities which make them less easy to retrain and less employable even when retrained. But exactly because of these limitations of the target group, the entire scheme has to be designed to work efficiently so that public resources are not wasted on a routine effort. Instead of blaming the workers for their failure to take advantage of the opportunities that the program offers, we should set up a program which can maximize their chance of success, given both their attributes and the specific labor needs of the industries.

The basic problem with the current approach, I believe, is that it is too centralized. Wisdom of government bureaucrats and expertise of vocational training professionals have been used largely instead of market signals and incentives. In addition to the heavy administrative burden it imposes on the already strained resources of the government, too much guesswork is involved in the process. For instance, the government suggests that we can use vacancy rates to identify the sectors which are in the greatest need of retrained workers. While they do give some idea of the tightness of the individual labor markets, these statistics are rather noisy signals of the underlying labor demand that should be guiding the allocation process. Since quota in future labor importation may depend on reported vacancies, there may be incentive on the part of the employers to overstate vacancies in anticipation of a better chance of securing imported labor. Moreover, and perhaps more importantly, while high vacancy rates in certain sectors may reflect slow dissemination of information about available jobs and low labor mobility, they can also be the result of the inability of the employers to offer a high enough wage to attract workers; this would indicatean industry's lack of competitiveness in comparison to other sectors. In this latter case, directing workers into these industries which have lost their competitive edge is certainly not an efficient use of social resources.

Another related problem concerns the development and delivery of retraining courses. Basically, within the current system, the training agencies sell their proposed courses to the government when both only have very generalized ideas about the skills needed in the market. While there are discussions about expanding the involvement of employers in the process, inputs from employers on course development are rather minimal in most cases. This separation of the buyer of the retraining services (the government) from the end-users of the product (the employers), I believe, is to blame for the unimpressive job retention rate of the trainees. Even with the best of intentions, the government is not in a position to ensure that the courses offered by the agencies, the courses that it pays for, actually satisfy the specific demand of the market.

Partly to deal with the inefficiency inherent in such a delivery system, the government has, amidst much fanfare, recently launched an alternative strategy for financing on-the-job training. Approved employers, mostly large firms invited by the government to participate in the scheme, can claim training allowances from the government for each eligible worker they hire, without going through any prior screening by the government. This approach has the advantage of greatly facilitating worker mobility, thereby alleviating the labor shortage problem in the expanding sectors at relatively low administrative costs and with little red tape; but it seems to be biased in favor of the larger employers and more employable workers, i.e., those who are not in the greatest need of government assistance. For many displaced workers who may have difficulty finding jobs by themselves, and who have to rely more on the government and third-party agencies to provide training to enhance their general employability, more efficient delivery of retraining remains the key to greater efficacy. There also needs to be better integration between the centralized government-sponsored training courses and decentralized government-financed on-the-job training, particularly in terms of benefit levels.

An Alternative Strategy of Retraining

Let us start by assuming that the government is able to identify the group of displaced workers that is eligible for retraining, so that the problem now is to develop training courses and locate prospective employers. Instead of trying to figure out, from very imperfect information, how many classes of each type of training are needed, the government should limit its administrative role to that of an employment agency, maintaining a database of the eligible unemployed workers from which potential employers can choose. Once a match has been made, the employer can enroll the prospective worker in courses offered by approved agencies. By passing on information about these successful matches, the government can also help the training agencies identify the type of employers they will be training the workers for, so that they can design their courses accordingly. Trade and employers' associations can also offer advice and assistance to the agencies in course development to ensure that the skills the workers acquire will be the ones they need. Reimbursement for the agencies for delivered courses will be on a per-trainee basis at standard rates to be set by the government. Since the agencies will now be competing among themselves for enrollment instead of selling their courses to government officials, they will have to better cater to the needs of the end-users, the employers. Together with the fact that the employers will have already derived some information about the workers during the screening process and have chosen only those they consider suitable, this process would facilitate better matching between workers, employers, and training facilities, thereby augmenting the chance of more lasting employment relationships.

At the same time, as is recognized by the government, there exists the possibility that the training required by certain employers cannot be efficiently provided by a third party, possibly because of the lack of expertise of the third party or the specialized nature of the skills. Therefore, to allow for flexibility, employers should have the option of training the workers themselves, much as is provided for under the government's on-the-job training scheme. The workers would be paid the market wages by the employers who, in turn, would be reimbursed an amount equivalent to what the government would otherwise pay for the retraining of an average worker over the first few months of employment. This ensures that workers will be trained in the most efficient way and that there will not be great discrepancies in costs across retrainees. It would be a waste of social resources if funds were pumped into training programs administered by third parties when the workers can pick up the appropriate skills more efficiently in the workplace.

By divesting the government of the many decisions it has to make in developing and sponsoring training courses, often without the necessary information, and allowing market forces to direct the allocation of training and labor resources, the strategy outlined here can reduce administrative costs and the burden on the government bureaucracy. More importantly, it can better match the supply of and demand for workers, enhancing the longer-term employment prospect of the displaced workers and alleviating the labor shortage in the expanding industries. That, after all, is the bottom line by which the success of the initiative is judged. For those with a penchant for central planning, an unimpressive success rate might be an impetus for more exercise at the drawing board: There is always that latest idea or information that can be the missing piece in the perfect design. But for the retrainee who has hoped for a new future but instead found himself stuck with skills that have no takers, the exercise would be more of one in futility.

Dr. William Chan is a lecturer in the Department of Economics, The Chinese University of Hong Kong.

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