One of the core definitions of business is the utilisation of resources to maximum effectiveness. When we look at the evolution of business and industry over the past century or so, we see that the role of leadership has been to manage the sourcing, utilisation and replenishment of resources to match market demand. The resource under management has changed from material, to money, to manpower. The resource providing maximum opportunity for differentiation has been the resource that has drawn the attention of the chief-executive and his team; therefore the discipline surrounding the management of this resource has seen research, development and the evolution of understanding and expertise. Globalisation and an ever shrinking world has ensured that the arbitrage on material and money have diminished beyond the point of significant return. Combined with the equalising impact of the Internet, the final frontier of resource arbitrage is people – the human resource.
Applying labour economics
Labour economics has been taught in economics courses and in human resource (HR) management courses for a long time. Unfortunately, it has not seen the transition from theory into application and we do not see HR managers thinking of concepts or learnings of labour markets when addressing their problems or when planning strategy. To do that we need two things to happen: understand what exactly labour economics is and to see how labour economics is relevant to HR.
Labour economics can be considered at two levels: at the micro level it is a study of how companies and the individuals in them operate and relate to each other. So, this is a study of the “market of people” as it were. The macro perspective helps us see how this market of people is influenced and influences other markets – for example, the money market or the stock market. So, for a country like India, the micro perspective analyses is, for instance, the recruitment levels of engineering graduates in a particular industry or why some organisations may have a higher proportion of workers etc. The macro analysis of the labour market would reveal that cost of labour in a particular state may be rising following an increase in foreign direct investment and an increase in the output from education and talent sectors, thus, raising the skill levels of the workforce there.
Basically, the study of labour economics is the study of the workforce and the forces and factors that influence it. Let us now look at the relevance of this study to the work of business. As we have established, the work of business today revolves around the work of the HR discipline. It helps to think of HR as a process with the following steps: sourcing, inducting, managing/maximising, enhancing and replenishing and understanding the role of labour economics in each of these.
Enhancing performance within an organisation involves knowing what skills and knowledge are required going forward, what capabilities are available in the workforce and conducting a predictive analysis of the whole market.
Sourcing: The challenges here are around numbers and quality. It is labour economics that identifies geographic areas where skills are available due to proximity to educational institutes and goes ahead to predict where skills will be either in short supply or abundance. Global organisations planning to set-up operations in the Asia Pacific region often seek an analysis of where skills are expected to continue to be available in abundance to support business plans. Following from smart sourcing is the ease of effective induction. Successful induction plans are tailored to the target group and this is possible with the demographic profiling and analysis that is a part of labour market analyses.
Enhancing performance within an organisation involves knowing what skills and knowledge are required going forward, what capabilities are available in the workforce, predictive analysis etc. One of the areas at the forefront of innovation in HR is that of internal labour market analysis, which treats an organisation as a labour market and analyze the workforce in many ways. The aim of this analysis is to establish relationships, unveil any causal relationships and result in predictive analysis. For example, a possible result is that an organisation could discover that employees in the research and development (R&D) function tend to leave the firm after five years. In conjunction with the metric that the proportion of middle management is higher in the R&D function, it is easy to hypothesise reasons for this spike in attrition.
Across examples and applications, the fundamental change that is taking place is that HR is becoming more of science than an art. And every science is driven by measurements, metrics and analysis of the environment in which it operates. Thus, while an individual HR manager or CEO may operate within the ambit of his firm on a daily basis, to stay in the daily time frame is akin to an ostrich burying its head in the sand. Checking with the state of the labour market, tracking key trends therein, applying ideas from there to the firm and understanding where the forces of the market touch the organisation – these are necessary to ensure the firm stays ahead of the game and does not end up following the pack. This is the source of innovation in HR that will sustain and yield rewards and it is true at both strategic and tactical levels.