The Optimal Skill Ratio

Abstract

Abstract Before entering into the details of personnel policies, the firm needs to have a general view of the right balance of its workforce. Indeed, choosing the right balance of the workforce is a key pre-requisite for sound personnel management. There are two key dimensions that should be considered: the skill composition of the labour force and the hours/employment trade-off. Labour is not a homogeneous quantity, and a highly skilled worker is a very different factor of production from an unskilled worker. Highly skilled workers are likely to be more profitable to the firm. But they are also likely to be more costly. A trade-off emerges, and the firm has to find the right balance between cost and productivity. In personnel economics, solving this problem means finding the optimal skill ratio. This chapter shows that the solution to this trade-off requires the analysis of relative costs and relative productivity, where the word relative refers to different skill level. In general, we will see that the best skill composition is not necessarily the cheapest skill composition nor the most productive composition.