education and training source: tito boeri and jan van ours (2008), the economics of imperfect labor...

Education and trainingEducation and training

Source: Tito Boeri and Jan van Ours (2008), The Economics of Imperfect Labor Markets, Princeton University Press.

What are we talking about?What are we talking about?

• Schooling and training: investments by individuals and firms – costs are paid in exchange for expected future benefits

• Formal schooling usually before individual enters the labor market

• Training usually after entrance into the labor market:– General– Firm-specific


What are we talking about? – II What are we talking about? – II

• Focus literature on schooling: choice of educational attainment

• Focus literature on training: who pays?• Market failures education and training:

1. Incomplete capital markets2. Private rates of return social rates of return3. Long time lag between decision and outcome4. Holdup problem


Overlaps with other Overlaps with other institutionsinstitutions

• Payroll taxes

• Unions

• Employment protection


OutlineOutline

1. Measures and cross-country comparison

2. Theory

3. Empirical evidence

4. Policy issues

5. Why do governments provide education and training?

6. Review questions


MeasuresMeasures

• Organization formal education very country-specific

• Educational expenditures as % of GDP

• Training: difficult to measure– Participation rate– Annual volume


Cross-country comparisons

Cross-country comparisonCross-country comparisonschoolingschooling

• Substantial differences in spending level: 4.1% (Greece) – 7.4% (Ireland)

• Educational attainment wide variation: 8.1/8.4 (Portugal) – 13.8/13.9 (Norway & US)

• Positive but imperfect correlation between spending and educational attainment

• PISA math score (15 year olds): Mexico lowest (80) – Finland highest score (113) – scaled to US=100



Cross-country comparisonCross-country comparisontrainingtraining

• For many countries information is missing• Differences in numbers depending on the

source (workers – employers)• Participation employer-sponsored training

– Belgium workers: 13% - employers: 41%

• Wide cross-country variation – workers:– Participation: 10% (Ireland) – 45% (Norway)– Annual hours spent: 8 (Italy) – 36 (Denmark)



Theory – schooling Theory – schooling

Basic assumption human capital model:

1. More education higher productivity

2. Higher productivity higher wage

3. Individuals’ choice is based on financial considerations

Investment decision:• Costs: direct expenses & forgone earnings• Benefits: higher wage (and employment rate)


Theory


Theory

Theory – training Theory – training

Human capital theory – main issue: who pays for training?

• Traditional: workers pays general training – firm pays firm-specific training

• General training:– Increases productivity but diminishing returns

– Training cost increase more than proportional

– Worker is paid according to productivity and chooses the optimal level of training maximizing revenue


Theory


Theory

Theory – training IITheory – training IIAlternative theory general training: non-competitive

markets• Employers have monopsony power: worker is

paid below productivity• Gap between wage and productivity increases with

training• Employers chooses the optimal level of training

maximizing revenue• Monopsony power: moving costs due to matching

and search frictions, asymmetric information


Theory


Theory

Empirical evidence - Empirical evidence - educationeducation

• Strong relationship between educational attainment and labor market status and earnings

• Wide cross-country variation in employment rates of low-educated men – 27.3 (Slovak Republic) – 92.6 (Mexico)

• Less variation among higher-educated men– 81.6 (Turkey) – 94.4 (Iceland)

• Wide range in relationship between earnings and education; men highest relative to average – 174% (Hungary) – 31% (Denmark)


Empirical evidence

Box 8.1 Returns to schooling & identical twinsBox 8.1 Returns to schooling & identical twinsAshenfelter and Rouse (1998)Ashenfelter and Rouse (1998)

Returns to schooling – percentage increase in wage due to 1 additional year of schooling– Account for differences in ability (more able more

education)– US sample of 340 twins– Direct estimate 10.2%– Twins: 8.8%– Ability bias: 1.4%

• Alternatives: Vietnam War lottery, variation in compulsory schooling age, distance to school


Empirical evidence

Empirical evidence – training Empirical evidence – training

• Only few estimates of rates of return to training

• Frazis and Loewenstein (2005)– 60 hours of training 34% (rate of return 150-

175%)– After correcting for potential selectivity rates of

return 30-40%


Empirical evidence

Box 8.2 On-the-job training in GermanyBox 8.2 On-the-job training in GermanyAcemoglu and Pischke (1998)Acemoglu and Pischke (1998)

Analysis of German data: apprenticeships = general training• Monopsony power of German firms• 5000 apprentices who stay in their firm apprentices

who quit for exogenous reason (military service)• Relative to voluntary quitters wage increase

– Stayers: 1.2%

– Military quitters: 4.5%


Empirical evidence

Policy issue 1: Policy issue 1: Should governments subsidize in-company Should governments subsidize in-company training?training?

• Is it optimal from a welfare point of view?• Deadweight loss?• Answer depends on market power of firms• Competitive market – employers reluctant

to invest in training – if productivity goes up: social returns to training

• If social returns > private returns: governments may step in and subsidize


Policy issues

Policy issue 2: Policy issue 2: Should there be a compulsory schooling age?Should there be a compulsory schooling age?

• All OECD countries compulsory schooling age• Is it welfare improving?• Individuals may be shortsighted – too high

discount rate – ignore future benefits (higher wages, lower unemployment)

• If social returns > private returns: governments may step in and subsidize scholarships are welfare improving


Policy issues

Why do governments provide Why do governments provide education and training?education and training?

• Having a higher educated population and a well-trained workforce has positive externalities – competitive asset

• Capital market imperfections impossible or difficult to borrow sub-optimal investments in human capital

• Investment in schooling and training national income goes up


Policy issues

Review questionsReview questions

1. Why do firms pay for general training even though trained workers are valuable for other firms as well?

2. Why is it difficult to measure returns to schooling?

3. Should the state subsidize on-the-job training?


Practicing with real dataPracticing with real data

• Box 8.1: Income, schooling, and ability:

evidence of new sample of identical twins (pag.

167-168).

• A Stata data file with the Ashenfelter and Rouse (1998) dataset, a do file and a log file are available at the website:

http://www.frdb.org/images/customer/ashenfelter.zip








education and training source: tito boeri and jan van ours (2008), the economics of imperfect labor...

Documents

tito boeri

princeton university

labor markettraining

imperfect correlation

market failures education

spending level

firms costs

finland highest score