Opinion | Skilling workers is a public good, needs bigger thrust

The definition of a public good is that it is something which is both non-rival and non-excludable. These are two technical words with precise meanings. The former means that if one person is consuming it, it does not deplete the quantity available to another. Think of clean air, or satellite television signals. The latter means that if one person is allowed to consume it, it is usually not possible to exclude others. An example of an excludable good is direct-to-home television signal, which is available only if you pay for the subscription but whose consumption is non-rivalrous. Encryption makes it an excludable good. Older economics textbooks had the example of a lighthouse that helped incoming ships with navigation into a harbour. Their light signals were visible to all and hence not excludable. It was a pure public good. But technology changed, and the light flash was replaced by invisible encrypted radio signals. So what used to be an example of a public good no longer qualifies as one. Thus, the example of a public good can vary with time and technology, but not the concept itself.

There is of course a continuum of goods which are between purely public or purely private goods. Access to a beachfront may be a public good, but with sufficient congestion, is no longer non-rival. Because of the non-rival nature of a public good, it can be “infinitely consumed”, which means that ideally, one should just pay a price close to zero.

However, how would one pay for the cost of producing it? For instance, reducing air pollution benefits all people, even those who did not pay for it. Indeed, the marginal consumer would be willing to pay a low or nearly zero price for it. Free market economics dictates that price equals marginal cost. Then the price of such a public good would fall to zero. This means that a private market economy would not support production of such goods (of reducing air pollution). This is why it falls upon governments to fund and provide public goods, paid for by compulsory taxation and often enforced with coercive laws.

This brings us to skilling. India has a huge skills shortage and skilled workers command a huge premium. Despite the shortage, there are not enough suppliers of “skill formation”.

The National Sample Survey Office’s 68th report says that only 4.7% of the workforce had formal skill training. Most workers acquire skills due to on-the-job training. However, their employers under-invest in the training. That’s because once a worker gets adequate training, his market value increases tremendously and he can be poached by another competing employer who did not have to “invest” in that worker’s skilling. As a result, collectively, the entire industry ends up under-investing in skilling, leading to an aggregate skills shortage and low productivity. Why can’t industry chambers come together and agree to train and skill their own workers, and also have a non-poaching agreement?

This does not happen because such cartels cannot sustain. Why can’t the workers themselves acquire skills through private skilling academies, since return to such education gives them a high premium? That’s because most workers cannot afford the fees that such private academies would charge. Besides, student loans for such skilling programmes are not easily available (unless prodded by the government). Such loans would have no collateral and can lead to large defaults and non-performing assets for banks. And there would always be a shortage of good teaching faculty, since they would be underpaid.

It can be argued that acquiring skills and benefiting from it is a private good, as the benefits are mostly enjoyed by the person who gets the skills. However, as is obvious from the argument above, there is an element of market failure in the provision of skills, and the nation as a whole is a loser. Human capital formation is suboptimal in the aggregate.

In a world of automation and robotics, it is vitally important to be equipped not only in the skills of today, but more importantly of tomorrow. When the average level of education and skills in society increases, it results in better quality of jobs, incomes and standard of living for all, not just the skilled persons themselves. This is the positive externality from skilling. The two-and-a-half-decade boom from software exports, resulting arguably from earlier public investment in engineering education, benefited not just the individual workers but also the country at large in many ways. Similarly, the continuing labour export to West Asia too benefited from investment in skill formation, whether it was nursing, masonry or electrical work. Of course, the primary benefit is to the skilled person, but a much larger secondary benefit is to the society. That’s the nature of this public good.

That is also why we need a much bigger thrust on skill formation, with the backing of the state treasury. The setting up of the National Skill Development Corporation in 2008, or the relaunching of the Pradhan Mantri Kaushal Vikas Yojana with substantial funding is an effort not too soon, and not overstressed. Even with substantial public funding, and support for accreditation and standardization, there is plenty of room for private initiative in profitable provision of skills. Indeed, this is one of India’s sunrise industries.

Ajit Ranade is an economist and a senior fellow at the Takshashila Institution.