Enterprise Skills and Firm Performance in Zambia : Evidence from Structural Equation Modeling of a Skills Demand Model
The objective of this Note is to investigate the skills that formal sector Zambian firms demand, the skill deficits they face, the strategies that firms may use to mitigate skill deficits, and their impacts on firm performance. The Note addressed t...
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| Format: | Report |
| Language: | English |
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World Bank, Washington, DC
2018
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| Online Access: | http://documents.worldbank.org/curated/en/149831532629962624/Evidence-from-structural-equation-modeling-of-a-skills-demand-model http://hdl.handle.net/10986/30184 |
| Summary: | The objective of this Note is to
investigate the skills that formal sector Zambian firms
demand, the skill deficits they face, the strategies that
firms may use to mitigate skill deficits, and their impacts
on firm performance. The Note addressed these issues by
estimating a multi-equation skills demand model, using
Structural Equation Modeling (SEM) methods, on unique data
of 350 formal sector firms developed and fielded jointly
with the Enterprise Survey Unit of the Development Economics
Vice Presidency (DEC). The skills demand model related
several latent constructs—organizational capital that drives
skills demand, skill gaps as perceived by employers, and
skill strategies—to firm-level productivity and wage
outcomes. The findings are consistent with the predictions
of the new productivity literature, skill-biased
technological change, and research on education and
training. First, ostensibly similar firms of the same size
within the same sector can have very different skill needs
and skill strategies that affect firm performance. The
firm’s organizational capital (know-how) drives skills
demand which, in the short term, is manifested in skill
deficits and in firm strategies to mitigate skill gaps and
respond to demand. High-skills demand firms, such as those
that innovate or export, face greater deficiencies in
workers’ cognitive and non-cognitive skills that pose
operational constraints for use of technology, innovation,
quality, and production. Some firms, but not others, respond
with skill strategies to fill job vacancies, hire skilled
expatriates, provide in-service training, and outsource
professional services. They also employ a more skilled
workforce with a higher share of tertiary-educated and
TEVET-credentialed workers, and workers in management,
professional, and technician occupations. Second, production
function estimates revealed that skill deficits negatively
affect labor productivity while responsive skill strategies
improve productivity outcomes. Interestingly, organization
capital only affects productivity through its effect on
increasing skills demand and thus expanding the gap between
desired and available skills and on eliciting skill
strategies from some firms but not others to address these
skills gaps. The endogenous choice to deploy skill
strategies was addressed using an instrumental variable
measuring the density of access to skill sources for firms
located in different regions and sectors. Instrumenting for
skill strategies increased our estimates of the causal
impact of skill strategies on labor productivity. Finally,
improvements in labor productivity are associated with
higher firm-level wages. In wage equations controlling for
skills composition of the workforce, industry and location,
firms with higher labor productivity paid significantly
higher average wages, roughly equivalent to two-thirds of
the higher labor productivity. Like the production function
results, skill gaps are associated with lower average wages
while skill strategies improve wage outcomes. This result is
consistent with the hypothesis that high skills-demanding
firms and firms investing in the skills of their current
workforce pay wage premiums to attract, reward, and retain
their most skilled workers. Wage levels are lower on average
in manufacturing relative to service sectors, and in
Lusaka-based firms, as compared to firms outside Lusaka
which face greater skill shortages. |
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