Enterprise Skills and Firm Performance in Zambia Evidence from Structural Equation Modeling of a Skills Demand Model The issue of skills is front and center in policy latent constructs: 2 (1) organizational capital or the discussions in Zambia: what kinds of skills are needed firms’ stock of intangible knowledge, (2) skill gaps as for the growth and modernization of the economy? are measured by employer assessments of the adequacy of the right kinds of skills being supplied by education current workforce skills and how skill deficiencies and training institutions? are there skill gaps in supply affect different operations, and (3) skill strategies or relative to what is demanded by enterprises? why do measures that employers might use to respond to skills so few Zambian employers provide in-service training gaps and changing skills demand. These latent to upgrade skills of their workforce? do skill deficits variables, and the relationships between them and constrain firm performance, and what can the private firm-level productivity and wage outcomes, were sector and policy makers do to remedy this, to improve estimated as a system of equations using Structural labor productivity and wages? Equation Modeling (SEM) methods. The findings are consistent with predictions of the new productivity Some of these issues are explored in a recent study of literature, research on education and training, and skills development and firm performance in the formal skill-biased technological change. sector of Zambia. 1 The study used data from a 2016 survey of 350 formal sector firms in Zambia fielded by First, ostensibly similar firms of the same size within the World Bank Enterprise Survey Group. The Zambia the same sector can have very different skill needs and Enterprise Skills Survey (ZESS) randomly sampled skill strategies that affect firm performance and the firms in four regions—Lusaka, Kitwe, Ndola, and distribution of productivity and wage outcomes. The Livingstone—stratified by firm size and sector. ZESS firm’s organizational capital drives skills demand elicited detailed data on key firm attributes: which, in the short term, is manifested in skill gaps and educational composition of its workforce; the firm’s in firm strategies to mitigate skill deficits. High-skills main sources of skills supply; employer’s qualitative demand firms 3 face greater deficiencies in workers’ assessments of worker skill deficiencies; workforce cognitive and noncognitive skills, and especially in the strategies; and information on labor productivity and operational constraints that skill deficits pose for use annual wages. of technology, innovation, quality, and production. This wealth of data was used to formulate and estimate a multiequation skills demand model, to measure three 1 Tan, Hong. 2018. “Enterprise Skills and Firm Performance ‘hospital quality’ is often associated with measurable in Zambia: Evidence from Structural Equation Modeling of a indicators such as the ratio of doctors to patients, access to Skills Demand Model.” Global Education Practice, World specialized medical care, intensity of nursing services, and Bank. responses on patient care satisfaction surveys. 2 3 A latent variable is one that, while not directly observable, Firms are categorized as being ‘high skills demand’ if they may be measured indirectly by different indicators. For are exporters and/or recently introduced new products or example, an individual’s ‘ability’ is not observable but it is services, and as ‘low-skills demand’ if they are neither often associated with higher IQ or other test scores; similarly, exporters nor innovators 1 ２ Enterprise Skills and Firm Performance in Zambia Some firms respond with skill strategies that include of firms, by firm size. ZESS firms are categorized by filling job vacancies, providing in-service training, whether they have low or high skill gaps and low or hiring skilled foreign labor, and outsourcing high skill strategies 4 to address the question: given a professional services. They also employ a more skilled level of skill gaps, are more vigorous strategies to workforce with a higher share of tertiary educated and mitigate skill deficits associated with higher labor Technical Education and Vocational Education and productivity? The x-axis measures the logarithm of Training (TEVET) credentialed workers and workers labor productivity, while the y-axis measures the in management, professional, and technician kernel density distribution of labor productivity in occupations. each group of firms. The left panel focuses on the sample of firms with low skill gaps, the right panel on Second, observationally similar firms can have very the sample with high skill gaps. Controlling for firm different skill gaps and skill strategies depending upon size, it is clear—for firms with both low and high skill their skills demand and location. On average, high gaps—that high skill strategies are associated with skills demand firms have larger skill gaps but more improvements in labor productivity. For each group of responsive skill strategies than their low skills demand firms, a high skill strategy shifts the mode and skew of counterparts, differences that hold for each firm size. the labor productivity distributions to the right of the Large firms with high skills demand have fewer skill distributions for the comparison group with low skill gaps, suggesting that they are better able to mitigate strategies, that is, to higher levels of labor skill deficiencies than their smaller counterparts. productivity. Location in the capital Lusaka, with its agglomeration of universities, TEVET institutions, and in-service Distribution of Labor Productivity by Firms’ Skill Gaps training providers also appears to confer a skills and Skill Strategies supply advantage to firms relative to location in other regions. Larger firms in Lusaka have fewer skill deficits and more responsive skill strategies than their counterparts in other regions. This implies that the skill needs of many larger firms located outside Lusaka are not being met. Third, skill deficits have a negative impact on labor productivity while responsive skill strategies improve productivity outcomes. These effects are estimated from production functions that account for capital intensity and the education, TEVET, and occupational composition of the firms’ workforce. Organization capital itself has no statistically significant impact on Finally, like the productivity results, more responsive productivity; its productivity impact arises primarily skill strategies improve wage outcomes. through increasing the gap between desired and Improvements in productivity are also associated with available skills and eliciting skill strategies from some higher annual wages, suggesting that employers share firms but not others to address these skill gaps. This two-thirds of labor productivity gains with their endogenous choice to deploy skill strategies was workers in the form of higher wages. Firms with high addressed using an instrumental variable (IV) skills demand and those investing in the skills of their approach relating skills strategy choices to a measure workforce pay wage premiums to attract, reward, and of proximity to different sources of skills supply. The retain their most skilled workers. Wages are lower in IV estimates suggest that skill strategies have large manufacturing compared to information technology causal impacts on improving labor productivity. (IT) and the service sectors and in firms located outside Lusaka which face greater skill shortages. To highlight this result, the following figure compares the distribution of labor productivity for four groups 4 We define skill gaps and skill strategies as being ‘low’ if are less than 0 and ‘high’ if factor scores are equal to or their factor scores (which are normalized to have mean 0) greater than 0. ３ Enterprise Skills and Firm Performance in Zambia Thus, policy concerns about the quality and limited from an expansion of the TEVET sector. There are supply of high-level skills, and the constraints they economic and equity justifications for doing so. pose for development and productivity growth, appear well founded. State support for the development of • TEVET offers growing numbers of secondary high-level pre-employment skills is distributed school graduates an alternative route to post- unevenly across regions and is focused on large public secondary education. The returns to TEVET are sector tertiary and TEVET institutions. In-service high, and TEVET graduates perform well in training for upgrading current workforce skills has career progression and in the labor market. received less attention, and the low incidence of employer-sponsored training in Zambia—which lags • Economic development calls for a more diverse behind other Sub-Saharan Africa countries and set of professional and technical skills, many in developing countries globally—needs to be addressed. short supply not only at the pre-employment level but also while employed within firms. The government has a critical role to play in facilitating firms’ responses to these two skill Facilitate Access to Foreign Sources of Skills challenges, especially in determining how to: (i) Many Zambian employers employ high-skilled increase the supply and market relevance of pre- expatriate managers, professionals, and technicians employment higher-level educational and TEVET because of limited local supply. They also outsource skills, across regions and from both local and foreign essential high-skill legal, accounting, engineering, and sources, and (ii) promote and finance expanded in- architectural services to professional services firms. service training and upgrading of workforce skills that Both strategies are limited by a lack of recognition of are so important for innovation and productivity foreign-obtained academic and professional growth. qualifications. • The government should work with South Increasing Higher-Level Skills Supply African Development Community (SADC) Given fiscal constraints, it is clear that the solution to regional partners to facilitate Zambian the first challenge cannot be further expanding the employers’ access to high-skilled foreign labor number of public universities and training institutions and critical services provided by professional throughout the country. services firms. Progress in this area will require greater coordination between the education Involve the Private Sector ministries and Zambian government agencies responsible for immigration, trade, and industry. The state can facilitate the private sector, both university and training institutions as well as industry, Develop Regional Centers of Excellence to play a greater role in the development of higher- level skills: Like other SADC countries, different skill gaps and skill mismatches exist in many sectors, and it is neither • The government should consider making state feasible nor desirable for individual countries to invest institutional support available, on a competitive scarce resources in all skill deficit areas. Rather, a case basis, to public and private sector tertiary can be made for a regional approach to collaboratively institutions that can work collaboratively with identify skill gaps and national capabilities and invest industry to deliver market-relevant education in a network of regional centers of excellence to and training. exploit economies of scale and specialization. • The state should consider co-financing delivery • Zambia should consider participating in the of skills in short supply at the regional level with SADC regional strategy to develop new sources qualified private sector partners, using public- of supply for critical skills. Ideally, centers of private partnership arrangements. excellence would work with the private sector to develop curricula, pedagogical methods, and Expand the Budget Allocation to TEVET new skills relevant to industry. The allocation of the education budget to TEVET is currently relatively small and the country could benefit ４ Enterprise Skills and Firm Performance in Zambia Promoting In-Service Training A second broad challenge is to promote in-service training and incentivize employers to sponsor in- service training programs for their current employees. Develop Cost-Effective Training Programs The in-service training modalities most likely to be effective are those that address the operational problems that skill deficiencies pose. Some training needs are firm specific, but most are likely to be either • This will require extensive consultation and general to all firms, sectoral based, or related to the use collaboration with industry partners, public and of specific technologies such as information and private sector providers, and other government communication technology (ICT). The high cost of bodies such as the Zambia Development training tailored to the specific skill needs of Agency, which has overlapping responsibilities individual firms may not be justified for the vast for SME business development and industrial majority of firms. Demand-driven training may be extension services. delivered cost-effectively to clusters of small and medium enterprises (SMEs) operating in the same Financing In-Service Training with Payroll Levies sector and geographic region. Zambia should revisit the introduction of a payroll • Their common skill needs would first be levy system to provide sustainable financing for in- identified by working with firms and local service training. The original proposal for such a industry associations and chambers of training levy was never adopted over employer commerce; programs targeting these skill needs concerns and because matching government funding would then be developed using local providers did not materialize. or, as needed, expertise from Lusaka or abroad. • Policy makers might look to the lessons of other • Such programs would be group based to reduce countries with successful models of payroll levy unit costs and costs shared by firm beneficiaries systems. These have been responsive to and the state. employers’ needs for continuous skills upgrading, given them greater control over how TEVETA Support for In-Service Training levy resources are used, and promoted the The TEVET Fund administered by TEVET Authority development of robust training markets. (TEVETA) focuses most resources on financing pre- employment training and TEVET infrastructure improvements. More resources should be targeted at developing and promoting in-service training, especially for SMEs and sectoral clusters of firms. • Given limited experience with in-service training, TEVETA’s initial focus should be on piloting and evaluating alternative training and (This brief was extracted from the study report cited in the delivery modalities, before going to scale once footnote #1 on page 1. The study was financed by the World the value of training and associated extensions Bank and carried out by Hong Tan who consults for the services is demonstrated. Such training would Education Global Practice at the World Bank.) be financed through cost sharing with firms.