Comparative Advantage in Human Capital

How Skills Determine What Course People Take

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Every organization needs strong leaders and human capital productivity. Developing the leaders of tomorrow can be a challenge, especially as the social dynamics of any organization can inadvertently filter out the technically competent talent or drive them out of the organization. 

Organizations allocate their finite resources, including human capital. Those choices determine what gets done now and charts the future of the organization. Comparative advantage is more than an abstract theory, it impacts organizational dynamics and each of our lives.

What does this mean?

More often than not, the right resource for a task is chosen based on a current-productivity assessment - who could do it faster, better, or cheaper.  That neglects key long-term strategic issues of developmental value, adverse selection, and capacity impact.

Developmental Value

Each undertaking accumulates experience, measured in knowledge, skills, and abilities, which is developmental value. Making decisions purely based on productivity neglects this developmental value.

Amazon’s first attempt at automating a warehouse was slower, less efficient, and more expensive than competing warehouses with less automation. If Amazon neglected the developmental value in their investments, they would have foregone a program that has made Amazon warehouses faster, more efficient, and cheaper.

The same holds true within firms’ human capital. If firms neglect the developmental value in assigning technical resources to technical tasks they forego the the developmental value of future leaders, depriving their technical assets of leadership opportunities and their organization of technical leaders.

Adverse selection

Adverse selection is choosing the most productive assets for direct productivity, leaving less productive assets for tasks where productivity losses are less apparent.

Every time a technical resource is assigned to a technical task to ensure that something is done better, faster, or cheaper now, one less technical resource is available for accruing developmental value.

If only one person in the office can to a technical task they’ll be selected, leaving everyone who doesn’t understand that task to manage it.

Capacity Impact

As organizations neglect issues of developmental value and adverse selection, several problems set in. Lower morale results in lower productivity and higher turnover, both of which have real costs. Additionally, the neglected development value means that the next round of work is completed by less skilled, less developed, and less productive human capital assets.

With fewer skilled leaders, fewer technical skills among managers, and other detriments - comparative advantage plays out between countries, firms, and human capital assets in ways ways we may not intend.