India needs to really gear up its skills development efforts. Lest we want to lose the international business battle.
Aging, Skills, Productivity, and Innovation
A review of psychology and economics literature suggests that performance in many physical and mental tasks declines with age, but that verbal ability and “soft skills” such as leadership are less tied to age. Older workers have a large stock of accumulated knowledge and high job match quality, both of which contribute to high productivity.
Another study finds that workforce aging may have some impact on firm productivity due to the decreased productivity of older workers with a university degree. Two studies indicate that leading to increased wages, workforce aging will tend to increase skills investment by youth. Over the long term, this will increase productivity and lessen the effects of population aging on living standards.
This increase in skills investment by youth will only occur if post-secondary education is readily available, according to one of these studies. This study found that the availability of places is a critical determinant of how many youths enroll in university programs.
A literature review on the effects of an aging workforce on innovative capacity notes that there is a very broad range of skills involved in innovation. Experience is a key element in the commercialization aspects of innovation, so that an older workforce may increase this dimension of innovative capacity. Much remains to be learned about what skills are required for innovation and the relation of these skills to age.
The results of this research underline the need to maintain or increase productivity growth if living standards are to continue to rise despite population and workforce aging. Further increases in skill levels of Indian workers can make an important contribution to productivity growth and to increased standards of living. The effects of population aging will not be the same in all labor markets. The modeling results indicate that population aging will tend to increase regional disparities within India, with the most rapid population aging occurring in the poorer regions. This is likely to lead to increased pressure for interregional transfer payments.
Hence it is clear that we have no other option than to boost our skills pool.
Population aging is likely to lead to increased scarcity of labor, relative to capital, thus resulting in an increase in wage rates relative to the return on capital. The sectoral and occupational labor markets where wages are likely to increase most rapidly are in the health sector, due to the rising demand for health services. Moreover, the demand for health services will increase more rapidly in the poorer regions. These regions may find it increasingly difficult to compete for skilled workers, especially in health.
Increased flexibility, allowing for part-time or part-year work, might be a useful approach to keeping older skilled workers attached to the labor force. As the cost of labor increases with population aging, employers are likely to adjust their employment practices to retain older workers.
There are barriers to increased flexibility that could be addressed by policy initiatives, including mandatory retirement, limitations on receiving pension income and employment income simultaneously from the same employer, and contributory plans that make it more expensive to hire part-time or part-year workers.
The composition of the skills available may change due to workforce aging. Research shows that certain physical and cognitive abilities decline with age. Older workers are less likely to acquire new skills, but over their work life, they have already accumulated a large stock of skills. Older workers may have relatively more soft skills and relatively less technical skills than younger workers, but both of these types of skills are important for innovation and for productivity growth.
