Refinery labor market issues
There was an interesting article in the Sunday edition of the Times-Picayune about employment in the refinery industry. It’s a pretty good article – journalists are often lousy economists (and vice versa), but the author, Matt Scallan, does a pretty good job.
The basic story is that there is a demographic problem at refineries. The baby boomers are nearly at retirement age. Refinery operators are worried about a shortage of workers. Of course, we know, they can solve this problem by simply offering more cash. The story hits on compensating wage differentials for safety and shift work (see my previous post on schools for an explanation).
What is new for avid blog readers is the portion of the article on specialized training. Most jobs involve some type of training. What is different across occupations is who “pays” for the training.
Some workers are hired at low wages while they are being trained. When I say low here, I mean wages that are in line with their current, untrained, productivity levels. Think of workers using company time to read a book – they can’t be producing stuff while they are reading the book. The expectation is that after they have acquired the skills, their productivity will increase and they will receive a wage increase. While the worker has not directly “paid” for the training, they have paid for it by accepting a lower wage while being trained (perhaps a lower wage than they could have earned elsewhere).
On the other hand, some workers receive high wages while they are being trained. When I say high here, I mean wages that are above their current productivity levels (think more in line with their future, post-training productivity, even though they are reading books and not producing stuff.) Here the firm is “paying” for training, by paying workers a wage above their productivity level during the training period.
What determines the difference? The difference comes largely from the specificity of the training.
Take a job at a place like McDonalds. Skills are being acquired – workers are learning how to interact with customers, how to run a cash register, etc. These skills are what we called general skills – they are valuable to a number of potential employers.
If McDonalds were to “pay” for training, some employees would accept these wages, enjoy the training, then go to a new firm (this option is available because the acquired skills are valuable at a number of employers). If McDonalds trains the worker, and the worker takes off, McDonalds would have “paid” for the training, but never have enjoyed the enhanced productivity of the worker. McDonalds would not have recouped their investment in training that worker. As a result of this possibility, McDonalds won’t want to pay for the training via high wages. Therefore, when you first start at McDonalds, your wage is low.
As noted in the article, many of the skills required by the refineries are what we call specific skills – skills that are valuable at only a small number of establishments. If the refinery trains a worker, they don’t have to worry about the employee jumping ship to a new industry, say the fast-food industry. The skills they have acquired are specific to the oil industry and are not valuable to non-oil industry employees. As a result, these firms are less worried about recouping their investment in training, as a result will pay workers high wages while they are being trained. The firm “pays” for the training by giving workers high wages (higher than their productivity levels) while they are still learning.
On this end, it seems extra tricky for the oil industry. There are serious specific skills that take time to acquire. Unlike McDonalds, the oil industry could have a hard time hiring trained workers in the immediate term, even if they “back up the truck” full of money. They are clearly anticipating this issue and taking steps to address it.
But alas, the market will signify the problem. A “shortage” of trained workers will cause upward pressure on wages in the industry. This upward pressure on wages will attract workers and make undergraduate programs in petroleum engineering more desirable, and hence enrollment will increase. The market signals the problem, and people respond.
It’s probably a very nice time to be a petroleum engineer. It’s probably a very nice time to be a petroleum engineering professor, too. Maybe I should dust off my Chemistry books…
–CT
You might know that some employers pay for their workers to attend MBA school.
Would you think MBA training would be general or specific?
How can firms ensure they can recoup the investment (of sending their employees to MBA school)?
If they don’t, what will happen?
February 7th, 2007 at 9:26 am
Very nice summation of the difference between generalized training and specialist training, and why a firm might pay for an employee to receive specialist training.
The closing question of MBA training is interesting. An MBA could be contended to be both Generalist & Specialist – Generalist in that most courses offer very little that could not be intellectually acquired by self-study, or in another format, but Specialist in the prestige, access to “old boy networks” and recognized credentials an MBA from a decent school (or suitable obscure school) offers.
Firms look to advanced training as a retention and job satisfaction Human Resource Tool. They may deem it less costly to allow employee educational advancement expenses to flow back to their company than to face higher turn over.
Other employers find they need to promise to pay for additional education to attract the type of employees they want.
Some will tag education benefits to employment longevity – either as a reward for previous service or with an expectation of continued service. Some managers essentially become indentured “owing” their employer so many years of future service in exchange for the employer paying for the MBA.
Having a “name brand MBA” from a renown international school did put the QC Seal onto a very good undergraduate business background and an exceptional tutorage from a very wise father. By “QC Seal” I mean that it gave prospective employers a known credential to judge me by, making their assessment easier.
Of course if firms receive no benefit from a MBA payment program, they will cease tending to pay for MBA educations. As they say “Today’s cow that gives no milk is Tomorrow’s hamburger.”
Steve W