In many different sectors of the economy there are particularly interesting links between workforce skill levels and the type of goods produced. For example, if few skilled workers are available in a sector, firms there may have an incentive to produce low quality products. This finding sheds some light on one possibly important cause of skills gaps. When products of high quality require highly trained workers to produce them, sectors can get stuck in a vicious cycle in which firms produce goods of low quality because there are few trained workers and workers acquire little training because few high-quality goods are produced. This chapter provides evidence of such interaction between skills and product quality that could arise from market failures generated by the low-skill, bad-job trap' (analysed in Chapter 6), the interaction between innovative performance and skills (developed in Chapter 5), or the complementarities between labour and capital (examined in Chapter 3).

The chapter examines the relationship between workforce skill levels, product quality and economic performance, by means of a detailed comparison of matched samples of biscuit manufacturing plants in Britain, Germany, France and The Netherlands. These findings are compared with those from similar cross-country comparisons in widely differing industrial sectors such as engineering, furniture manufacturing and clothing. Value-added per employee-hour in the German sample of plants was estimated to be some 40% above that in Britain and between 10% and 20% higher than in The Netherlands and France. This pattern of productivity performance could not be attributed to inter-country variation in the age and sophistication of capital equipment in use. But there were important differences in skill levels.