No Teens, No Tech: How Shortages of Young Workers Hinder Firm Technology Investments
Currently, 70% of U.S. firms report difficulties in hiring skilled labor (Manpower Group, 2024), and labor scarcity is expected to aggravate in the future due to demographic change. How are firms adjusting their investments strategies in response? Do they increase investments in automation technology to compensate for the lack of workers? Or are they forced to forego technology adoption because the workers needed to install and maintain the technology are also in short supply? A particularly relevant group in this context is young workers, not only because they are scarce but also because they may play a critical role in firm technology adoption. Compared to incumbent workers, young workers can acquire new tech skills at lower opportunity costs, they have higher expected returns to human capital investments, they may inherently possess more digital skills, and they can be hired in occupations demanded for technological transitions. In consequence, the reduced supply of young workers may hinder firms’ technology investments.
Empirically analyzing how supply reductions of young workers affect firm technology adoption is challenging since the causal effect of reduced labor supply is often confounded by simultaneous factors, such as changes in labor demand.
In a new working paper “No Teens, No Tech: How Shortages of Young Workers Hinder Firm Technology Investments”, I leverage a natural experiment resulting from an education reform to overcome this empirical challenge and estimate the causal effect of young worker shortages on firm technology adoption. In 2001, two East German states implemented a reform that extended the length of schooling by one year. This caused a missing cohort of students eligible for vocational training. In Germany, unlike the U.S., vocational trainees are considered middle-skilled professionals, working in occupations that would often require bachelor’s degrees in the U.S.
I first compare trainee employment in the two states affected by the education reform to those in states unaffected by it, and indeed find that trainee employment dropped significantly in the years around the reform. This means that firms in the reform states were indeed facing a supply shock of trainees.
How did this affect their technology investments? I next compare firm investments in the states undergoing the trainee shortage to those in the other states and find that the shortage led to a decline in firm investments in tangible assets and information and communication technologies (ICT). This suggests that trainees and technology investments are complements, rather than substitutes. While the investment decline was temporary, with affected firms catching up to control firms once the shock was over, the decrease was substantial — about one-fifth of a standard deviation in the affected years. Underlining the link between foregone investments and forgone technology adoption, the technical status of firms’ machinery depreciated in affected firms. Also, there was a significant decline in organizational changes that often accompany technological shifts, such as IT-driven workplace restructuring.
Why do firms rely so heavily on vocational trainees to adopt new technologies?
Consider that new technology vintages create new tasks, which in turn require new, vintage-specific skills. Firms will assign these tasks to the workers who can acquire the new skills at the lowest costs. Since vocational trainees are initially untrained and therefore little productive, they have lower opportunity costs for acquiring new skills and potentially greater productivity gains compared to incumbent workers. As a result, firms prefer to complement their technology adoption with young workers rather than retraining incumbent workers.
Turning back to the empirics, I find support for the idea of vintage-specific skills: the investment decline was more pronounced in firms where incumbent workers had outdated skills, and less pronounced in firms where incumbent workers still possessed the adequate skills, eliminating the need for vocational trainees to complement the adoption of new technologies that required new skills. I also find more general empirical evidence that young workers complement firm technology adoption: When asked why they engage in vocational training, firms largely agree that it ensures the supply of new skills and helps adapt to technological change. Also, young workers more often work with new technologies than older workers.
Overall, the findings suggest that young workers play a crucial role in facilitating firms’ adoption of new technologies, and their scarcity can hinder firms’ technology investments. Does this mean that firms won’t adopt any new technologies as the workforce ages? Probably not. As opposed to the large, short-term labor shortage studied in the paper, adjustment mechanisms are likely to emerge in response to gradual, long-term population aging: wages of young workers would likely increase, increasing their supply, firms might start outsourcing, attracting migrants etc. However, I am confident to conclude that the adoption of new technologies comes at higher costs when young workers are not available compared to when young workers are available.