Working Paper Series no. 739: The Innovation Premium to Soft Skills in Low-Skilled Occupations

Using data from the United Kingdom, we show that as a result of technological change, there is an increased demand for technical skills and therefore for skilled workers. However, this effect benefits all skilled workers, regardless of their occupation or the company that employs them. Conversely, for low-skilled or unskilled workers, whether an innovative or non-innovative company employs them can make a significant difference. Figure 1a therefore compares the average hourly wages of firms that invest in R&D with those that do not, for occupations that require a minimum level of education, and Figure 1b for those that require advanced training or qualifications. For the former, the wage gap persists throughout working life, with a premium for those working in innovative companies, while no such difference seems to exist in the case of the latter.

Based on these findings, the study shows that, even in a very advanced technological environment, the most innovative companies still value certain low-skilled tasks and therefore pay higher wages than a less innovative company would for these professions. We develop a model to rationalize this idea. Namely, the model is constructed around the view that all firms value qualified workers (usually managers, engineers, etc.) on the basis of their technical skills and reputation acquired during their careers. To some extent, these characteristics are observable and verifiable, for example by reading a CV. A company can therefore replace a skilled worker with another worker who theoretically possesses comparable skills with a relatively low risk of error. Conversely, the most innovative and technologically advanced companies tend to value certain skills of their less skilled employees more than other firms.

These firms generally have a flatter than average organizational hierarchy, which translates into increased complementarity between different workers, especially between those in low-skilled occupations and those performing more complex and technical tasks. Therefore, in these types of structures, it is extremely risky to employ people who regularly make mistakes. These companies have therefore developed a critical need for the skills of their less educated workers, such as initiative and reliability. These "soft-skills" are not normally recognized with a qualification and are therefore difficult to observe and, potentially, difficult to replace. More innovative companies are therefore willing to pay a wage premium to their employees and invest more in training their workers.

The model delivers a number of predictions that we then takes to the data. Namely: (i) workers in low-skilled occupations get a positive and sizeable premium from working in a more innovative firm; (ii) workers in low-skilled occupations exhibit on average a higher degree of complementarity with the firm's other assets (and in particular high skill workers) in more innovative firms compared to in less innovative firms; (iii) the wage premium to working in a more innovative firm for workers in low-skilled occupations increases with the complementarity between their quality and those of other workers; (iv) workers in low-skilled occupations have longer tenure in more innovative firms than in less innovative firms as more time will be spent by more innovative firms to enhance (or learn about) these workers soft skills; (v) a more innovative firm will invest more in training its workers in low-skilled occupations to increase their level of soft skills than a non-innovative firm; (vi) a more innovative firm will outsource a higher fraction of tasks which involve lower complementarity of workers in low-skilled occupations with the firm's other assets.