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Talent allocation key to boosting total factor productivity

WANG QICHAO and WANG BING | 2020-11-18
(Chinese Social Sciences Today)

Job seekers talk to recruiters at Hefei University in Hefei, Anhui province, at a job fair for college graduates. Photo: XINHUA

As China's economy transitions from a phase of rapid development to a new stage of high-quality development, improvement in total factor productivity will become the main engine of future economic growth.
Total factor productivity refers to the comprehensive production efficiency of all factors, and represents growth in real output, which is in excess of the input growth (such as labor and capital). Instead of following the law of diminishing marginal returns of production factors, total factor productivity represents an inexhaustible driving force which promotes sustainable economic growth.
That said, effective talent allocation is vital to boosting total factor productivity and serves as a guarantee to ensure the implementation of strategies that invigorate China through science and education, strategies which develop a quality workforce, and innovation-driven development strategies.
Talent allocation
Rational allocation of talents is key to the high-quality development of China's national economy. Earlier studies found that if production sectors become more attractive to talent, human capital will boost economic growth by improving productivity and driving technological innovation. However, if talents flow into sectors that redistribute wealth, rather than engaging in direct production, their contribution to economic growth will be limited. 
In other words, the more talents serve production and innovation in the real economy, the better economic performance will be. In today’s China, in the context of a "cold" real economy and "hot" fictitious economy, talent allocation tends to "shift from real to fictitious," which hinders the further improvement of total factor productivity.
Human capital is attached to the labor force, and the allocation of talents is mainly a reflection of individual career choices with economic rationality. In recent years, there has been an obvious talent gap between industries, resulting in highly educated workers being more likely to choose high-paying industries such as the financial sector.
Though China has accumulated rich human capital, thanks to the popularization of higher education, the allocation of talents among industries is far from balanced. When considering the average length of education in the employed population, the manufacturing industry is at a disadvantage, with more than 50% of the total workforce being employees who hold a junior high school diploma. 
According to the 1% National Population Sample Survey in the year of 2005 and 2015, the average years of education for manufacturing employees were 9.37 years and 10.26 years, respectively, with those with a junior middle school education accounting for 55.83% and 52.42%, respectively, while those with higher education account for 5.81% and 12.07%. In the same period, the average years of education for those employed in the financial industry are 13.45 years and 14.27 years, respectively, and those with higher education account for 55.11% and 69.63%. 
From the perspective of an industry entry threshold, from 2000 to 2010, the standard deviation within the average years of education of employees in the financial industry was 2.60, while the deviation in the manufacturing industry was 2.62. The difference in the average education levels between the two industries is not sharp. 
However, in 2015, the standard deviation in the average education years of employees in the financial industry was 2.56, which was significantly lower than the 2.74 of the manufacturing industry. This indicates that from 2010 to 2015, the financial sector's employment threshold increased significantly. More importantly, if wages and compensations are equal, educated individuals are more likely to choose finance, especially when the barrier to entry in finance is a college education, and the barrier to employment in manufacturing is unclear. The different employment thresholds in each industry increase the possibility that highly educated talent would prefer employment in finance. To improve total factor productivity, it is necessary to optimize the pattern of talent allocation among industries.
Total factor productivity
Both the financial sector and the real economy contribute to the growth of total factor productivity, and therefore both are in urgent need of highly educated employees. If highly educated human capital is allocated to the financial sector, it will produce financial innovation and meet the capital demand of economic growth, improving total factor productivity. If highly educated human capital is allocated to the real economy, it can improve the R&D and innovation capacity of the production sector, which could also improve total factor productivity. Therefore, we found that talent allocation and total factor productivity show an inverted U-shaped relationship, when city and enterprise variables are controlled, and there is an optimal allocation ratio.
Innovation ability within human capital positively impacts total factor productivity and plays a decisive role in economic growth. At present, China’s talent allocation is severely uneven. Compared with the financial sector, the real economy’s human capital is not sufficient. Even worse, educated workers are excessively biased towards the financial industry, threatening to disturb the market order.
Our study found that the inflection point of talent allocations between finance and manufacturing industries is 1.10. Out of 283 prefecture-level cities in China, there are 273 cities whose talent allocation has been excessively biased towards the financial industry. If talent is efficiently allocated towards manufacturing, Chinese manufacturing total factor productivity can continue to grow by 2.7%, which is economically significant.
In the face of complex international and domestic situations, China's real economy, especially the manufacturing industry, has suffered some setbacks. However, its long-term upward momentum will not be reversed. China has built the world’s most complete and independent industrial system for manufacturing industries, and China’s added value ranks first in the world. 
In addition, the real economy is the bedrock of a strong country. Relevant data from China's Statistical Yearbook over the years shows that the added value of China's manufacturing industry accounts for about 30% of the GDP, and the manufacturing industry plays a pivotal role in promoting high-quality economic development. Not to mention that China has formulated and implemented a strategic plan to invigorate the real economy, and local governments are also actively promoting the development of the real economy.
Shifting from fictitious to real
Talents play an essential role in simulating the real economy and boosting total factor productivity. At present, China's total factor productivity growth in the real economy has reached a deadlock. The reasons behind the scene are complex, but the government must take into account the insufficient talent allocation. In terms of policy tools, a combination of "visible hand" and "invisible hand" can be applied to guide highly educated talent to shift from fictitious to real sectors. Only by ensuring sufficient human capital can manufacturing be built into the most active field of technological innovation.
For the real economy, attracting talent is the top priority. According to the Manufacturing Talent Development Guidebook, by 2025, the talent shortage in the new generation of information technology, high-end CNC (computer numerical control) machine tools and robots, biological medicine and high performance medical apparatus and instruments, are all expected to reach 9.5 million people, 4.5 million people and 450,000 people, respectively. 
In 2017, investment in science and technology R&D accounted for 1.14% of the GDP in manufacturing. If we consider the complementarity between physical capital and human capital in the production process, we cannot simply rely on increasing scientific and technological investment to promote productivity growth. Therefore, it is extremely urgent to recruit talent in the manufacturing industry.
Reforming finance entities is a chess game. Going forward, active market-oriented reform of the financial sector will reduce or even eliminate the industry monopoly, thus downplaying its attractiveness to highly educated talent. This will make it possible for highly educated human capital to gradually flow into the real economy. An optimized pattern of rational talent allocation in the financial sector and the real economy will ensure that both sides promote each other and develop in a circular manner.
Wang Qichao is from the School of Economics at Capital University of Economics and Finance; Wang Bing is from the School of Economics at Jinan University.
Edited by YANG XUE