B45, Second Half - The Technology of Skill Formation

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The Economics of the Public Sector – Second Half

Topic 9 – Analysis of Human Capital Policies

Public and Private Job Training

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PUBLIC AND PRIVATE JOB TRAINING

A large fraction of an individual’s human capital is acquired through post-school investments on the job. Formal job training is an important component of these investments.

Private training programs have not been evaluated very often. However, when analyzed, it is common to find substantial effects of these programs on earnings and on worker productivity.

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For the US, Mincer (1989) finds that returns to private job training (in terms of wages) are as high as 16-26%.

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These are large effects. However, who benefits from training? Firms can discriminate across workers and offer training only to those for whom training yields high returns. Workers themselves decide whether or not to undertake training based on their characteristics.

It is very common to find that prior education and cognitive ability are major predictors of who receives training.

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For example, Carneiro and Heckman (2003) document that both schooling and cognitive ability increase the probability that a worker receives company training.

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Blundell, Dearden and Meghir (1999) study the determinants and effects of qualification and company training using a sample of UK individuals.

They find that higher ability and better educated individuals are more likely to receive employer provided training than others. They also find that training has significant effects on individual’s earnings.

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Training in Portugal – Almeida & Carneiro (2006)

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Before we turn to a discussion of the benefits of specific training programs, it is important to reiterate a few general points that critically affect how we interpret the evidence on training. In evaluating any public project, it is necessary to account for the welfare cost of raising public funds as well as the direct cost of providing the services. In accounting for human capital projects (or any type of investment project) it is necessary to estimate accurately the time series of returns and to discount appropriately to compare with project costs.

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Public job training is a heterogeneous activity. It includes classroom education, make work, subsidized employment and job search. The rate of return to classroom training is sizeable. The rates of return for other components of training, however, are generally lower, although subsidized work appears to have a large payoff. Even when an activity such as job search assistance is profitable, the scale of gains from the activity are low. One cannot expect substantial benefits from job training.

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Lalonde (1995) reviews the job training literature for the US and concludes the following:

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What are the main lessons from the evaluation literature across the world?

First, you get what you pay for. Low cost public job training programs cannot yield large benefits to program participants.

An exception to the rule is classroom training, the returns to which are substantial (Heckman, Hohmann, Smith and Khoo, 2000).

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Second, the effects of treatment vary substantially across groups.

It is often hard to find programs with substantial effects on outcomes of youth and adult males. Positive effects of programs on females are more commonly found.

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Third, job training programs also have effects on behavior beyond schooling and work that should be considered in evaluating their full effects.

Reductions in crime may be an important impact of programs targeted at male youth.

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The evidence summarized in Heckman, Lalonde and Smith (1999) indicates that the rate of return to most US and European training programs is far below 10 percent, although the benefits to certain groups may be substantial, and some may pass cost-benefit tests.

We cannot look to public job training to remedy or alleviate substantially skill deficits that arise at early ages.