Effective Skill Formation: The Missing Link between Capital Investment and Increasing Prosperity

Abstract

This paper argues that industrial relations systems play an important role in converting investment into sustainable growth. However, in order to understand this linkage, it is necessary to view skill formation as a key outcome of industrial relations systems. Skill formation is more than simple education or training for a given job. The terms is used here to capture the processes that help workers acquire marketable skills and employability in the broader labour market. It is through effective skill formation that capital flows create sustainable growth. When effective skills formation is absent, investment flows can create employment in the short-run but as market conditions change, the newly created employment can quickly disappear. Effective skill formation, it is argued, mediates between investment and sustainable growth through both equity and efficiency processes occurring within industrial relations systems. Thus, a lack of effective skill formation and absence of voice mechanisms have contributed to the making of the crises although these effects have not been the same in every country. A corollary to this hypothesis is that economies with more effective skill formation processes and greater voice would be the first ones to recover from the crises, other factors held constant.